Wednesday, May 31, 2017

Would Hayek Have Supported a Carbon Tax? A Rejoinder to Robert Murphy

 On April 12, I posted "Hayek on Carbon Taxes: Prices Without Markets or Markets Without Prices?" both on this site and that of the Niskanen Center. On May 30, Robert P. Murphy posted a response on the Institute for Energy Research. I submitted a rejoinder as a comment, but some readers of the IER site have not been able to view it, so here is my rejoinder in full.

(1) With regard to “hijacking the legacies of deceased libertarians”: I would have thought that it would be obvious to any reader that to say, “Hayek would have supported a carbon tax,” is simply a rhetorical device that means “Hayek’s works contain arguments that bear directly on this issue.” I said that explicitly in the first sentence of my post. There is no hijacking going on here.

To be sure, beyond the substantive issues, there is the parlor game of finding quotes in the master’s text to illustrate one’s own views. I am happy to engage in that parlor game, as long as we both recognize that is all it is. So, in the spirit of the game, here is a quote I did not use in my original post, but which seems relevant to the discussion, and somewhat at odds with the one you cite:

“Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. . . In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created, does not prove that we should suppress competition where it can be made to function.” (Road to Serfdom, p. 40)

Here Hayek goes even further than I would. I have not suggested resorting to “direct regulation,” as Hayek does, but rather, to the somewhat less intrusive administrative action of imposing a price that, although it does not directly arise from competition, still serves the purpose of notifying market participants that the resource in question (the waste-disposal capacity of the atmosphere) has non-zero value.

IMO, Hayek puts the burden on you to explain how “competition can be made to function” in the absence of prices, or how carbon prices can be made to emerge spontaneously (even better).
(2) I don’t recall mentioning the social cost of carbon in my post, so I don’t see why I should be asked to “admit” anything one way or another about the Obama administration’s SCC estimates. 

However, let’s stipulate, arguendo, that they were ideologically biased. Without going back to check the documents in question, it was my impression, the last time I read them, that the high end of the range of SCC estimates was biased mostly by the assumptions made regarding the discount rate rather than those regarding the ECS. More generally, I have found that the discount rate issue dominates the ECS issue in all discussions of the SCC, not just those of the Obama administration. This seems like a side issue, though.

(3) You write, “So it’s true, Hayek was not in principle opposed to a tax on negative externalities, but as a pragmatic matter he warned that limitations on knowledge should make us very wary of rushing in to “fix” the market outcome when we are operating in a sea of ignorance. This is the exact opposite of Dolan’s conclusions from Hayek’s writings on knowledge.”

Actually, what you write is completely consistent with my views. Yes, let’s be wary of “fixing” every alleged market failure. Amen. However, sometimes we have to face the reality that we are operating in a “sea of ignorance,” as you put it, or, to use the standard language of business and economics, that we are engaging in decision-making under uncertainty. Yes, we do not know the optimal carbon price. Given our uncertainty, we must decide whether to act as if the optimal price is zero (that is, to do nothing) or to set it at some positive value, which we cautiously set at a level near the lower end of the range of plausible values. That is the way that real economic decisionmakers in business or finance go about things when they have to set the price on a new product or submit a bid for an asset the true value of which is “hidden in a sea of ignorance.” 

In short, the burden of proof is on opponents of carbon pricing to show that zero is the true optimal value. The awkward thing about that is that there are no purely economic arguments that arrive at that result. That is why the opponents of carbon taxes always fall back on arguing the science of climate change, not the economics of climate policy. They never dare to answer the central economic question, which is, “If it were the case that the social cost of carbon had a nonzero and positive value, then what would be the correct policy response?”

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