Robert P. Murphy – August 30, 2019
A recent article in The Guardian trumpeted the findings of a new study published in Science that found massive tree planting would be — by far — the cheapest and most effective approach to mitigating climate change. Ironically, the new thinking shows the pitfalls of political approaches to combating so-called “negative externalities.” The good news about tree planting disrupts the familiar narrative about carbon taxes that even professional economists have been feeding the public for years. The whole episode is an example of what Ronald Coase warned about, in his classic 1960 article showing the danger in the traditional approach of using taxes to fix alleged market failures.
Ronald Coase vs. A. C. Pigou on “Externalities”
Coase’s “The Problem of Social Cost” is one of the most frequently cited economics articles of all time, but it can be difficult for a newcomer to absorb its lessons. In this revolutionary piece, Coase challenged the standard approach to externalities that had been developed by economist A. C. Pigou.
According to Pigou, the market economy works fine in allocating resources efficiently under most circumstances. However, when third parties experience benefits or harms because of particular market transactions, the Invisible Hand fails. For example, if a factory dumps waste into a river as a by-product of making TVs, then the factory owner is making “too many” TVs because the owner isn’t taking into account the harm his business is imposing on the people living downstream. The profit-and-loss system presumes that consumers and firms are receiving feedback from the impact of their actions, and so (Pigou argued) a case of pollution leads to inefficiency.
Pigou suggested that in a case like this, the government should impose a tax on the TV factory, corresponding to the harm that additional output causes to the people living downstream. The tax would then lead the owner of the factory to scale back production, to the point at which the “marginal” TV produced would bestow roughly equal benefits and costs to society, taking everything into account. (Without the Pigovian tax, the factory owner would produce additional TV sets for which their marginal cost to society exceeded their marginal benefit, meaning society would be worse off because of these additional units.)
For the purpose of this IER post, I’ll have to be brief, but here is the quick and dirty version of how Ronald Coase came along and completely upended this traditional Pigovian analysis: First, Coase told his readers to stop thinking of these situations in terms of the good guys and bad guys. In my hypothetical TV factory case — which is my example, not Coase’s — we shouldn’t view the factory owner as someone violating the downstream homeowners. Rather, Coase urged his readers to consider, what he called, the “reciprocal nature” of the problem.
Specifically, Coase would say in our example that the real problem is one of scarcity and competing uses for the river water. The factory owner would like to use the river as a place to dump his waste after producing TVs, while the homeowners would like to use the river for their kids to play in or to wash their clothes. The two uses are incompatible, and the issue is: To which party should the use of the river be allocated? Coase warns us that if the government installs a TV tax on the factory, the politicians are simply assuming that the most efficient solution to the conflict is for the factory to scale back TV production.
But we can imagine better outcomes, depending on the specifics. Suppose, for example, that there are only a few households who live downstream from the factory, and are harmed by its waste products. In this situation, rather than the owner greatly scaling back TV production — and depriving consumers around the country of having cheap TVs — maybe the least-cost solution is for the factory owner to buy the properties from the few families and pay them to move somewhere else. Note that we are talking about voluntary exchanges here; the people aren’t being evicted by the sheriff. Rather, just suppose for the sake of argument that for (say) $2 million, the factory owner could buy out the families living downstream, and everybody would be much happier than the outcome that would result under a TV tax.
Now that we’ve worked through this hypothetical example to illustrate the out-of-the-box thinking Coase developed in his 1960 paper, I’ll demonstrate its relevance to the new study about trees and climate change.
Tree Option Might Greatly Reduce the “Social Cost of Carbon”
As The Guardian piece explains, the new study is far more optimistic about the scale of tree planting available on Earth than had been earlier believed. This is why the scientists involved in the study think a massive campaign of planting trees is now the single best approach to mitigating climate change. Here are some key excerpts from The Guardian article:
Planting billions of trees across the world is by far the biggest and cheapest way to tackle the climate crisis, according to scientists, who have made the first calculation of how many more trees could be planted without encroaching on crop land or urban areas.
As trees grow, they absorb and store the carbon dioxide emissions that are driving global heating. New research estimates that a worldwide planting programme could remove two-thirds of all the emissions that have been pumped into the atmosphere by human activities, a figure the scientists describe as “mind-blowing”.
“This new quantitative evaluation shows [forest] restoration isn’t just one of our climate change solutions, it is overwhelmingly the top one,” said Prof Tom Crowther at the Swiss university ETH Zurich, who led the research. “What blows my mind is the scale. I thought restoration would be in the top 10, but it is overwhelmingly more powerful than all of the other climate change solutions proposed.”
Citing a figure that planting a new tree costs roughly 30 cents, Prof. Crowther remarked that we could plant the target of 1 trillion trees by spending about $300 billion. Sure, that’s a big number, but its nowhere close to the economic cost of imposing a worldwide carbon tax, the “solution” that many economists have been promoting for years as a no-brainer. (William Nordhaus’ model in its 2007 calibration estimated that even his modest carbon tax would cause several trillion dollars [in today’s dollars] in economic compliance costs, while the more aggressive proposals would cause more than $20 trillion in economic costs.)
This episode is a specific example of the type of problem Ronald Coase warned about. Specifically, the carbon tax logic assumed that the problem was, “People are emitting too much carbon dioxide and we need to coerce them into scaling back.” But what if instead the problem was, “People aren’t planting enough trees, and we need to coax them into planting more”?
To give some quick numbers: By some estimates, a single healthy tree can sequester up to a ton of carbon dioxide by the time it reaches 40 years old, and we also read that a silver maple tree will absorb 400 pounds of carbon dioxide by the time it reaches 25 years old.
So consider a coal-fired power plant that is going to emit a ton of carbon dioxide in order to produce some additional electricity. If the pro-tax economists had gotten their way, there would be a $42 tax levied on the power plant, since the Obama EPA estimated that that was the “social cost of carbon” for the year 2020.
Yet if there is room on Earth for more trees — given the plans of everybody else — that Obama-era estimate greatly overstates the harm of the emission. Rather than imposing $42 in damages as the EPA calculations suggested, the power plant owner could spend a mere $3 to plant 10 trees, meaning that over the next two decades the trees would have absorbed more than the additional emissions, and would in fact continue reducing CO2 in the atmosphere for decades beyond.
As this simple example illustrates, a carbon tax of $42 would have been a gross overkill. It would have led power plants and other firms to scale back their emissions in very costly ways that stifled economic growth, when — apparently — there was a much cheaper solution available. And notice throughout all of this discussion, I am stipulating the basic externality framework for the sake of argument, and am merely showing the problems that Ronald Coase demonstrated with this one-size-fits-all way of thinking.
A Theater Analogy
Consider a movie theater. It’s a problem that people sometimes drop popcorn and other litter on the floor. Now there are two ways the theater could respond: (1) It could install cameras and personnel to monitor the customers and heavily fine anybody caught dropping stuff on the floor. This would be a huge inconvenience and make movie-going far less pleasant. Or (2) the theater could hire personnel to clean up the floor after a show. And notice that even if some combination were used — maybe the theater calls the police on somebody who just runs up and down the aisles dumping soda on the floor — there is no reason that the “fine” imposed on litterers should be used to pay the salary of the employees who pick up popcorn with a broom. Those are two totally different considerations.
When it comes to carbon taxes, the conventional logic has simply assumed that penalizing emissions is the appropriate solution to the ostensible problem of harmful climate change. But maybe that is totally wrong. Perhaps it would make far more sense to pay people to plant trees.
And while it’s true that some carbon tax proposals contain (mild) provisions for reforestation, there is no reason at all for those programs to be linked. In general, taxing carbon is a very inefficient way to raise government revenue. If tree planting is truly superior, then it would make more economic sense to use general tax funds for the subsidies. There is no reason at all to earmark carbon tax revenues for reforestation; this would be as silly as insisting that movie theaters only pay the clean-up employees out of their “litter tax” rather than the general revenues from ticket sales.
New developments in the scientific literature show that tree-planting might be the single best way to reduce the human contribution to carbon dioxide in the atmosphere. The whole episode shows the folly of top-down political solutions to social challenges. Even if we stipulate the standard framework of “market failure,” it does not follow that a carbon tax set to the “social cost of carbon” is the way to restore efficiency. The case for a carbon tax is much weaker than the so-called experts have been assuring us.
Image source: Getty