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Over 3300 economists around the world have signed the Economists’ Statement on Climate Dividends. Original co-signatories include Nobel laureates (27!), former Chairs of the Federal Reserve, former Treasury Secretaries, …

Let us be clear, upfront, that it is important that

• so many credentialed, prominent economists have come together to call for action to address climate change; and
• these economists agree that it is past time for polluting “externalities” to be internalized into financial transactions

Over 3,300 economists have now signed this statement on the carbon tax, making it the largest public declaration in the history of economics: https://t.co/iG5Os9gRSa

— Martin Ravallion (@MartinRavallion) February 17, 2019

As leading environmental economist Frank Ackerman put it to me,

it’s great to hear that lots of utterly mainstream economists think a response to climate change is needed, and that a carbon price is part of that response. 

Even so, the Economists’ Statement on Climate Dividends is troubling on several accounts, including that it seems oblivious to some basic Econ 102-level economic realities.

Some background

First published 16 January in the Wall Street Journal, as news and excitement mounted about the Green New Deal, the Economists’ Statement evolved from the Baker-Schultz climate dividend plan and could be seen as the calm, collective, experienced, incremental, classics economic theory‘s alternative to an unbridled effort to transform American society while radically reducing emissions. As Baker-Schultz implies, the Economists’ Statement originated with conservative thinking about how to engage productively in discussion about how best to address climate change mitigation. Proponents assert that it “represents the largest expression of combined economic expertise in American history”.

Think ‘classic economic theory’ as this statement fails to stand up to basic scrutiny in part because it is such classic Dismal Science and enshrines Homo Economicus as core to humanity’s future.

A very quick summary of the short statement:

• Climate change is real, a threat, and requires action.
• Pricing carbon is the most effective way to do so.
• Thus, set a price on carbon that increases, gradually, over time to let the ‘invisible hand’ drive decision-making on investments to less polluting options.
• With price in place, end regulations and other government interventions (inefficiencies) related to carbon.
• Use 100% of the revenues for dividends because this will boost public support.

Why “Dismal Science“?

One clean example makes stark how over 3300 (including many of the most accomplished) economists got it wrong with this Statement.

• Carbon pricing has significant differential impact across sectors.
  • $10-$20 ton is enough of a tipping point to accelerate, rapidly, coal off the grid and reduce natural gas seriously.
  • $50/ton would barely dent liquid fuel demand without accompanying policies.
  • The statement gives no indication of an understanding of this simple truth: what is a “powerful signal” in one sector is barely noticed in others.

Let's also talk transportation. Unlike electricity, carbon taxes are quite weak in transportation. That $50 / ton carbon tax that would kill coal and turn natural gas electricity into backup? It would raise the cost of a gallon of gas by… 50 cents. Minimal impact, if any. 14/

— Ramez Naam (@ramez) February 9, 2019

In other words, these world-leading economists are flocking to sign on to a statement that seems oblivious to a simple reality: in terms of climate impacts, a price is not a price is not a price … What ‘kills coal’ barely would barely wound natural gas and oil.

As Climate Shock author, economist Gernot Wagner, put it to me in an email:

 it’s always meant to be a political document that basically says: “Economists support carbon pricing.” The dividend bit is there based on who the organizers are, but that’s about it. It’s not some sort of legislative text. It’s simply a sign-on statement that went viral. The fact that it only reflects econ 101 and not, say, econ 102 or political economy 101 is unfortunate but doesn’t really matter in that context. …

What’s telling in general is that e.g. the two Nobel laureates best positioned to know the details — Nordhaus and Krugman — did not, in fact, join their fellow Laureates. (I didn’t sign either, in case that matters.)

Can’t we rely on the Invisible Hand & Homo Economicus?

As a basic point, the failure is classic “liberal market economics” perpetuating the falsehood of “the invisible hand” even as putting in policy (pricing) to shape the ‘invisible”. 

The rejection of regulation as a legitimate part of policy is great example of Homo Economicus thinking without integrating/involving any of the learning from behavioral economics over the past several decades. As per study after study of Misbehaving humans in the real world, humans are not perfectly informed, perfectly rational actors across our economic decision-making. And, while a strong believer in the value of pricing externalities as part of changing course toward a prosperous, climate-friendly society, real-world experience demonstrates that ‘pricing’ doesn’t work in absence of accompanying policy (e.g., regulations) in many energy domains.

The Economists’ Statement derives from the Climate Leadership Council whose explanation makes clear an intent to eliminate significant regulations (while eliminating any/all liability for past emissions). E.g., let’s issue ‘Get Out of Jail Free’ cards to firms who have fostered confusion in climate discussions for decades while undermining the ability to have a “well-regulated” economy structure “invisible hand” decisions to drive ever-greater emissions reductions.

As one pulls threads on the Economists’ Statement, one starts to wonder just how many of its authors really thought about what they were signing — past a desire to sign on to a symbolic statement. For example,  

• there is (yet again) the assertion that 100% of any carbon price should be returned as dividends because it will boost the political popularity. 
  • While I tend to fall into thinking that having a decent share as ‘rebate’ would foster increased support (and is a minor path toward addressing economic inequalities), I have yet to see proof that this is actually true rather than assertion.
    • The “Stand-Up Economist” (Yoram Bauman) is (one of) the economist(s) with the most intimate experience with dividends and electoral results. He simply doesn’t see the proof for the political utility assertion and challenges assertions about “fairness”. These were principal reasons he didn’t sign the Statement.
  • In addition, the basic logic of 100% returned is hard to justify.
    • What carbon pricing system around the world is giving 100% of revenue back as dividends? None by recollection.
    • As Ackerman put it to me, “Why the 100% return requirement? Nothing else in public life is required to be 100% revenue-neutral, why should climate policy have to meet this strange standard? Public investment, infrastructure, basic research are all important, along with dividends to ease the possible regressivity of a carbon price.”
• 100% discounting of the future, in terms of dividend payment
  • Giving out dividend, today, ‘rewards’ people alive today while reserving nothing (investing nothing) for those tomorrow.
• Assumption that individual knows better than the collective (e.g., government) is one of the greatest myths promoting by the GOP and accomplice economists.
  • While there are things the individual knows better (what clothing their children like; whether they want to save money for vacation or go out to restaurants; etc …), there is so much that the ‘individual’ isn’t in a position to know better (what concrete should be used to repair the road; how to recruit/train teachers/police/etc; public health; etc…).
  • Giving 100% of the money back in a dividend is an implicit embrace of ‘individual knows better’ (Homo Economicus) ideology.
• etc …

The “Economists’ Statement” totally misses what is the core of Hal Harvey’s highly technocratic Designing Carbon Solutions: there is no silver bullet, no one size fits all answer to addressing climate change.

No single policy can solve climate change, but a broad portfolio of policies already available to policymakers can drive down emissions.

And, as Ackerman sums it up, “prices are not enough.”

In addition to undermining non-pricing mechanisms, by asserting ‘a single price uber alles’, the Economists’ Statement fails to meet very basic analytical standards to support their statement along with these other failures.

Thus, let’s celebrate the Economists’ Statement on Carbon Dividends for highlighting that pricing pollution has widespread support across the economics profession while recognizing that signatories are promoting a flawed structure that does not stand up to scrutiny.

Selected Bibliography: In addition to material cited/linked in the post, here are some discussions of the Economists’ Statement that I found interesting/useful.

• George Harvey, Flaws in the Baker-Schultz Plan
• Michael Balstenberger, The Economists’ Statement on Carbon Dividends and the Green New Deal This is a quite useful post reviewing a variety of opinions on The Economists’ Statement.
• Noah Kaufman, Leading Economists Offer 5 Carbon Tax Recommendations: 3 1/2 are Basic Principles of Economics, examines The Economists’ Statement against basic Dismal Science principles.
• John Cochrane, The Economists’ Statement
• Charles Steele, Why I Won’t Sign Onto Climate Leadership Council’s Plan
• Michael Strain, What to Do With the Revenue From a Carbon Tax