Tuesday, July 29, 2014

Budget Deficits and Climate Change Politics

This article highlights that President Obama and the Democrats are changing tactics in their worthwhile attempt to build a political coalition to reduce U.S GHG emissions.  The Green Team now wants to tell a narrative that the U.S will save money over the long run by reducing GHG emissions now.  The basic logic is that by spending money now that future disasters that will be costly will be less likely to occur and the savings from the avoided future disasters more than offsets the upfront costs of investment in low carbon technologies today.  Note that this is a different narrative than yelling;  "we are all going to die, we are all going to die". Instead, the issue is posed as one of intertemporal budget tradeoffs.

The key problem with this argument is the following.   Today, the USA produces roughly 20% of the world's GHG emissions.  With the growth of China and India, this percentage is likely to decline by 10% in a few decades.    Suppose that President Obama and President Hilary Clinton are successful at reducing U.S total emissions by 50% over the next two decades.   When I multiply .5 by .1 I get  5%.  This means that all of this effort will only reduce world GHG emissions by 5% if the rest of the world free rides and ignores the U.S effort.

President Obama must build a narrative to convince people that if the U.S leads that the rest of the world (including Russia and China) will follow.  I would like ask the very smart Jason Furman  --- what is the chain of dominoes such that if the U.S takes the lead that the rest of the world follows?  If we don't burn our coal, won't we just sell it to other nations who will burn it?  

If we anticipate that the rest of the world will Free Ride and won't follow our lead, is the U.S unilateral action today "good for us"?  Let's see President Obama's smart economists do some game theory!  Aren't there multiple equilibria in this game?