In a recent
paper in this journal (1), basic things go wrong with the
economics. Economists are known for their fierce disagreements and spotty
forecasting. Economists agree, however, on accounting principles. The balance
of payments must be zero. Money is conserved. If you earn more than you spend,
you build up savings. If you borrow money, someone has to lend it to you. If a
country exports more than it imports, it builds up foreign assets. (1) violate this principle. Their
capital account is zero by assumption, and their current account is balanced
over time rather than at each point in time. Money disappears from Earth and
reappears years later. This is bizarre. It is hard to think through the implications
for their results. The optimization algorithm would shift income from the
future to the present as that would increase net present welfare. Climate
policy adds trade in emission permits, and so opens up a new channel to
transfer money. More income is thus shifted to the present. Emission reduction
costs are artificially lowered.
Economists also
agree on a few idealized states of the economy that make for useful yardsticks.
(1) claim to use “Negishi weights”
to balance the current account over time. Negishi weights, however, establish a
mathematical equivalence between a hard-to-solve market economy and an
easy-to-solve planned economy (2). (1) did not use Negishi weights. They
used other weights instead. Therefore, their solution represents neither a
market equilibrium nor a social optimum. It is not known what they computed. As
per capita incomes are assumed to converge over time, the optimization
algorithm would use international trade to transfer income – exporting below
cost price – in the near future from poor to rich countries; and transfer
income back in the distant future. As
poor countries typically are exporters of emission permits, the costs of
emission reduction are artificially inflated, and further so because the market
does not clear.
The abatement cost
estimates of (1) are biased downwards because
rapid technological progress is assumed for renewables but not for fossil fuels.
Qualitatively,
the main findings of (1) are not new (3): Without nuclear, baseline
emissions increase and it is harder to meet any particular emissions target.
There is one option less to reduce emissions. Climate policy is more expensive
as result. Their quantitative results, although new, are meaningless, as argued
above, and only roughly in line with previous studies because of cancelling
errors.
Reference List
1. Bauer,
N., Brecha, R. J., and Luderer, G. (2012) The economics of nuclear power and
the climate change mitigation policies. Proceedings
of the National Academy of Sciences.
2. Negishi,
T. (1960) Welfare Economics and Existence of an Equilibrium for a Competitive
Economy. Metroeconomica 12, 92-97.
3. Weyant,
John P. (1993) Costs of Reducing Global Carbon Emissions. Journal of Economic Perspectives 7, 27-46.
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