Views of Martin Weitzman on Carbon Pricing
The following quotations are significantly incomplete.
Martin Weitzman was a Professor of Economics at Harvard University. He is among the most influential economists in the world according to IDEAS/RePEc. His research has focused on environmental economics, including climate change, the economics of catastrophes, cost-benefit analysis, long-run discounting, green accounting, and comparison of alternative instruments for controlling pollution.
Summary of Carbon Pricing Views
“Global warming is a global public-goods externality whose resolution requires an unprecedented degree of international cooperation and coordination.” … “The important thing is acquiescence by each nation to a binding minimum price on carbon emissions.”
Nations or regions could meet the obligation of a minimum price on carbon emissions by whatever internal mechanism they choose a tax, a cap-and-trade system, a hybrid system, or whatever else results in an observable price of carbon.
The transfer payments to lubricate compliance with harmonized national carbon prices could take the form of contributions from the developed countries that are earmarked for helping the developing countries finance low-carbon technologies.
[ Negotiations, Treaty Mechanics, Comparisons ]
References and Full-Text Links
2015-01 Weitzman, Martin. “Voting on Prices vs. Voting on Quantities in a World Climate Assembly” (25 pp.)
2013-11 Weitzman, Martin. “Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?“ Journal of the Association of Environmental and Resource Economists 1, no. 1/2: 29–49.
2011-07 Weitzman, Martin. “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change.” (18 pp.) Review of Environmental Economics and Policy.
19740=-01 Weitzman, Martin. “Prices vs. Quantities.” (15 pp.) Review of Economic Studies.
Fundamentals of Global Carbon Pricing:
1. The International Climate Problem Is a Free-Rider Problem
Global warming is a global public-goods externality whose resolution requires an unprecedented degree of international cooperation and coordination. This international climate-change externality has been characterized as the biggest public goods problem that humanity has ever faced. ||| By now, the quantity-based Kyoto-type approach has pretty much broken down, leaving the world with a highly non-optimal patchwork of sporadic regional volunteerism that does not address centrally how to correct the critical externality of global warming. The primary lesson I take away from the breakdown of Kyoto is the need for fresh thinking, new insights, and, perhaps, a di¤erent global-design approach to the externality problem.
2. A Global Carbon Price Is Needed
However, in actuality the important thing is acquiescence by each nation to a binding minimum price on carbon emissions, not the particular mechanism by which this binding minimum price is attained by a particular nation.
3. Cap-and-Trade Can Comply
“Nations or regions could meet the obligation of a minimum price on carbon emissions by whatever internal mechanism they choose a tax, a cap-and-trade system, a hybrid system, or whatever else results in an observable price of carbon.” (A Uniform Carbon Price, 2013-11)
4. Green Fund Transfers Are Essential
Nothing in the model excludes side payments to help obtain an international agreement on harmonized national carbon prices. The transfer payments to lubricate compliance with harmonized national carbon prices could take the form of contributions from the developed countries that are earmarked for helping the developing countries finance low-carbon technologies.
Why a Global Price Is Easier to Negotiate
1. A Price Simplifies Negotiations
In post-Kyoto practice this n-dimensional [quantity based] coordination problem has proven intractable and has essentially devolved into sporadic regional volunteerism. By contrast, on the price side there is a natural one-dimensional focus on negotiating a single binding carbon price, the proceeds from which are domestically retained. |||
Put directly, it is easier to negotiate one price than n quantities especially when the one price can be interpreted as fair in terms of equality of effort.
With n different nations, there will be difficult bargaining over n different caps with no force countervailing each nations selfi sh desire to be a free rider and secure for itself a large cap on emissions.
2. A Global Price Provides a Countervailing Force against Free Riding
Significantly (and unlike negotiated quantities) the negotiated uniform price on carbon emissions embodies an automatic “countervailing force” against free-riding self interest by incentivizing agents to internalize the externality.
If I am assigned a cap on emissions, then it is in my own narrow free-riding self interest to want my cap to be as large as possible. … There is no countervailing force on the other side encouraging me to lower my desired emissions cap because of the externality bene ts I will be bestowing on others. ||| A binding uniform price of carbon emissions has a built-in self-enforcing mechanism that countervails free riding. |||
3. A built-in self-enforcement mechanism that internalizes the externality.
I believe this third property is arguably the most important property of all.
- [Alternate version of #3] Embody countervailing force against narrow (free-riding) self interest by automatically incentivizing all negotiating parties to internalize the externality.
3. The Benefit of a Focal Point
Generally speaking, a focal point of a n-party coordination game is some salient feature that reduces the dimensionality of the problem and simplifies the negotiations by limiting bargaining to some manageable subset, hopefully of one dimension.
A natural one-dimensional focal point to facilitate finding an agreement with relatively low transactions costs.
4. Why Caps Appear Unfair to Poor Countries
5. International vs. National Cap-and-Trade
Within a nation, the government assigns binding caps. But among sovereign nations, binding caps must be negotiated. I believe that this is a crucial distinction for the success or failure of a cap-and-trade regime. ||| There is thus a critical distinction between intranational and inter-national cap-and-trade systems.
Treaty Mechanics
1. Monitoring
2. Compliance/Enforcement
For enforcement, perhaps there is no practical alternative to using the international trading system for applying tariff-based penalties on imports from non-complying nations in the form of border-tax adjustments.
3. Uniformity of the Global Price
4. Hitting a Target with a Price
5. The Cost of Pricing is Low
6. The Use of Carbon Revenues
7. How to count exiting carbon taxes
8. Who Should Initiate the Treaty?
Comparisons that Assume Successful Negotiations
1. Price Volatility
In the real world, I think that energy price volatility is very poorly tolerated by the general public. Swings in carbon prices, especially in extreme cases, could sour the public and discredit for some time the entire idea of a market-based approach to the climate change problem.
It is difficult for me to imagine the broad public getting quite so upset because total emissions are uncertain.
2. International Wealth Transfers
The revenues from an internationally harmonized carbon tax are retained internally within each nation, and could be used, for example, to offset other taxes. This, I think, is a desirable property. By contrast the revenues generated from an internationally harmonized cap-and-trade system flow as visible external transfer payments across national borders,which might be less easily tolerated by nations needing to pay other nations large sums of taxpayer-fi nanced money to buy permits.
3. Corruption
It has been argued, I think convincingly, that a carbon tax is more easily administered and more transparent than a cap-and-trade system. This consideration is especially important in a comprehensive international context that would include all major emitting countries. Under international cap-and-trade, governments will allocate valuable emissions permits to their nations fi rms and residents. The incentive for kleptocrats to steal these valuable emissions permits and sell them on the international market is presumably much more rewarding than the temptation to not enforce an internal tax on emissions.
Voting Model and Result. “The theoretical model shows that population-weighted majority rule for a uniform price on carbon emissions can come as close to global efficiency as the median marginal benefit (per capita) is close to the mean marginal benefit (per capita).”
[Summary (not exactly in Weitzman’s words):
- If Ci'(Ai) = ci + G Ai, (individual marginal costs vary by a shift, but not in slope)
- And Bi'(A) = bi + B A, (individual marginal benefits vary by a shift, but not in slope)
- Then the order of individually preferred prices is the same as the order of bi.
- So the median vote is near optimal if median bi is near average bi. (The ci’s don’t matter.)
This shows that a majority-rule voting regime can work to internalize the emissions externality pefectly if some fairly strong regularity conditions are satisfied. Although this result is not terribly strong, it stands in stark contrast to complete absence of similar results for negotiations (voting on) n quantities instead of one price.]
“The majority-rule carbon price pˆ is close to the optimal carbon price p* when the median marginal benefit bˆ is close to the mean marginal benefit b‾. This is as good a result as one might hope for from a voting solution. … I fi nd it difficult to argue whether the mean marginal benefit of abatement per capita should be greater or less than the median marginal benefi t of abatement per capita. If the two are equal, then majority voting obtains the optimal solution.”
Alternative Approaches to Negotiation. Analysis of Modified Cap-and-Trade: Suppose the cap-and-trade negotiators must decide the total amount of emissions [Y] and the fractional allocation of emissions [aj] for each nation. … It appears that such a cap-and-trade system could in principle have desirable focal-point and countervailing-force properties if the assigned fractions {aj} were accepted and bargaining were restricted to negotiating Y. But … Where do the {aj} come from in the first place? They are presumably the result of a n-dimensional negotiating process where there is no countervailing force to the selfish desire of country j to make its own aj as high as possible.
A refinement of modified cap-and-trade: We might try to imbue the {aj} with focal-like salient qualities by imagining naturally symmetric allocations of {aj} . One such seemingly symmetric formula might be that each country is assigned the same fractional reduction of emissions from some agreed-upon baseline year. The Kyoto Protocol of 1997 adopted just a little of the spirit of this idea for developed countries alone. For me, [the Kyoto experience] largely testi es to the great difficulty of negotiating binding international caps on the major emitters. … it has been over-whelmingly problematic to assign binding quantity-like distributional coefficients {aj} on a worldwide basis.
Yj = aj Y, (23)
Other modifications: [1] Assigning the same worldwide emissions level per capita. Such an initial distribution of caps would involve massive transfers from the developed to the developing countries that would likely prove politically unacceptable. [2] Alternatively, one might imagine negotiating (or even voting on) an identical worldwide percentage reduction from some base case of emissions. In this situation, I think, everyone would rst argue about the baseline emissions that they were initially assigned.
Summary: Here is what I think is the essence of the one-price vs. n-quantities negotiation problem of this section. A quantity-type system based on a formula like (23) involves two layers of negotiations. First, the n parties must agree on the n quantity-like distributional coefficients {aj}. Then, second, the parties must agree on the single aggregate level of Y . By contrast, a price-based system involves only one layer of negotiation, focused on agreeing to a single one-dimensional uniform price p.