In a previous job, I 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 page. These two modes of thinking I call “status quo reasoning” (seeing the world as it is) versus “state of nature reasoning” (seeing the world as a blank slate).
Some recent research demonstrates the importance of status quo reasoning. In a new National Bureau of Economic Research working paper titled “The trade and climate implications of US LNG exports» James Stock of Harvard University and Matthew Zaragoza-Watkins of UC Davis examine how the United States’ shift from a net importer of natural gas to a net exporter has affected greenhouse gas emissions. For a time after fracking began in the United States, natural gas prices became disconnected from other energy prices because the U.S. market was flooded with natural gas and export options did not exist. not really. However, during the period 2012-2016, permits were granted and LNG export terminals were built, allowing US energy companies to export LNG worldwide. By tapping into the global market, U.S. natural gas prices “reconnected” to global energy market prices: natural gas prices rose and began to move in tandem with oil and coal, like this has been the historical trend.
What is interesting is their discussion of climate effects. In their summary, they write:
“We estimate that the effect of this recoupling on the price of domestic gas is comparable to a carbon tax of $30/tonne. For coal prices, which are coupled to gas prices through competition in the electricity sector, this effect is comparable to a carbon tax of $20/tonne. Using the NREL ReEDS model, we estimate that this recoupling reduces U.S. power sector CO2 emissions by approximately 145 million tons by 2030” (emphasis added)
Many proponents of a carbon tax falsely claim that there is no price on carbon. This is the fallacious “state of nature” reasoning I discussed above. In the state of nature, there is no price on carbon. But in the real world, carbon comes at a price. There may be no monetary price, but there is always a form of price. When natural gas (a considerably cleaner energy producer than oil and coal) entered the market, carbon consumption plummeted. Additionally, as the price of natural gas is added to the prices of other energies, people have saved on the use of natural gas (which, although cleaner than other energy sources, nevertheless emits CO2), as well as oil and coal. Overall, this resulted in a reduction in carbon emissions as if a carbon tax were applied! The market, quite unintentionally, helped solve the problem externality by imposing a price on carbon.
Moreover, this commercial alternative to carbon taxes is likely, in net terms, more effective than a similar carbon tax. In other words, even if this coupling had the same effect as a $30/ton carbon tax, it probably did so with less waste. Whenever we talk about public policy, we need to discuss the political process and how the sausage is made. Politics is a complicated business, and imposing a carbon tax is no different. Even if we assume that the tax is passed without cost and without any political shenanigans, there remain the administrative costs of the tax (i.e. all costs incurred when administering the tax: hiring people to perceive it and calculate it, audits, etc.), which reduces its effectiveness. But with this market process, these potential costs do not exist.
In the state of nature, the interventionist could propose a carbon tax that is too high (or too low). But, given the status quo, by examining the total effects and not just the marginal effects (like Ronald Coase stressed so long ago in The problem of social cost), we have a much clearer idea of which interventions might be necessary and which might not.
