A heterodox take on the climate issue – Interview with Robert P. Murphy

Published on February 14, 2021, at 20:50 PM (Montreal time),

Jean-François Thibault (JFT): Hello Mr. Murphy, first of all let me thank you for accepting this interview. You are Senior Fellow at the Fraser Institute and Research Fellow at the Independent Institute. You also earn a Ph.D. in economics from New York University. Along with Ross McKitrick, Professor of Economics at the University of Guelph, you published a report called OFF TARGET in which you conclude that the economics literature does not support the 1.5°C climate ceiling. At the outset, a question burns my lips: where did you get the idea to do research on this theme and from this angle?

Robert P. Murphy (RPM): In addition to my position with Fraser, I previously was the Chief Economist at the Institute for Energy Research, a Washington D.C.-based think tank that specializes in energy issues from a free-market perspective. In that capacity, I spent years researching the economics of climate change, and I realized that the peer-reviewed research did not support the aggressive climate policies that were being proposed by activists and some climate scientists.

I spent a long time researching what are called Integrated Assessment Models, or IAMs, and in particular, I studied the so-called DICE model of William Nordhaus. So I had known for years that Nordhaus’ model—and those like it—tended to support fairly modest targets for limiting climate change. Because of this, when Nordhaus won the Nobel (Memorial) Prize in economics for his work on climate change, at the same time that the UN released a report on limiting global warming to 1.5 degrees, I knew that there was a huge discrepancy. I think this is what initially set me on the path to proposing to Fraser that Ross McKitrick and I publish our study. (Ross is an expert on environmental economics and tax policy.)

JFT: Your report concludes that « although advocacy of aggressive climate-change policies is often draped with the mantle of science, mainstream economists who follow the scientific literature have shown that the popular 1.5°C policy target will pose costs that far exceed the benefits ». Could you provide the main arguments that led you to that conclusion?

RPM: We had several different arguments to bolster our claim that, at least according to the standard literature, the costs of the 1.5°C target would be much higher than the benefits. First, we summarized the results of Nobel laureate Nordhaus’ model in its latest calibration. Nordhaus’ « optimal carbon tax » would still allow for a cumulative 3.5°C of warming through the year 2100. (There are other elements of Nordhaus’ work that I will discuss in relation to the next question.) 

Second, we provided estimates of the « social cost of carbon » that were derived from the literature, and used for example, by the U.S. Environmental Protection Agency (EPA) under both the Obama and now Biden administrations. This approach estimates that the social cost of carbon in the year 2030 (at a 3% discount rate) is $62 per ton. But the UN’s own analysis of the 1.5°C target suggested that for it to pass a cost-benefit test, the implied social cost of carbon would have to be in the range of $135 – $5,500 per ton. So note that the implicit cost of carbon dioxide emissions used to justify the UN’s proposals was anywhere from 2 – 89 times the magnitude of the Biden Administration’s estimate. This is another way of seeing that the draconian 1.5°C is far too aggressive; it is a cure worse than the disease.

Third, we critiqued those few studies that purported to show that the benefits of the 1.5°C target exceeded its costs. My co-author and I pointed out numerous flaws with these studies, lending credence to our other arguments that showed the benefits did not exceed the costs. 

JFT: Your report mentions Nobel Prize Winner in Economics William Nordhaus, an American economist and professor at Yale University. Could you summarize Nordhaus’ thinking on climate change? Also, why was it appropriate to recall his ideas in your study?

RPM: It was appropriate to single out Nordhaus and his DICE model because, as mentioned earlier, the announcement that he had received the Nobel for his work occurred on the same weekend that the UN released its « Special Report » on limiting global warming to 1.5°C. There were even news reports (for example, in the New York Times) that treated both events as complementary. The overwhelming majority of readers would have assumed that Nordhaus’ work supported the UN’s goal, but we knew that wasn’t correct. Especially in a political climate where those skeptical of government intervention are told to « listen to the science, » it was ironic that most commentators seemed unaware of the economic literature’s lack of support for the 1.5°C target.

In general, Nordhaus acts as an economist would: When assessing how much action the government should take (for example, how high to set a carbon tax), he weighs the (marginal) benefit of avoided climate damages against the (marginal) cost of slower economic growth. Many activists and natural scientists write as if aggressive decarbonization will be costless or even provide a « double dividend, » meaning that we will « save the Earth » as well as help the economy. But Nordhaus knows that isn’t correct; there is a reason humans rely so heavily on fossil fuels: they are very dense, convenient vehicles of energy storage and distribution. So if government policies place penalties on using carbon-intensive processes, it will make goods and services more expensive than they otherwise would be. 

Nordhaus immersed himself in the scientific literature to come up with reasonable estimates of the impacts from various amounts of global warming. His DICE computer model then simulates the global economic and climate system for a few centuries in order to assess the damage caused by carbon dioxide emissions at various dates along the way. This allows Nordhaus to calculate the trajectory of an « optimal carbon tax, » which would (in principle) force businesses and households to « internalize the externality » and take into account the true social cost of their activities. For the typical economist, the goal isn’t to immediately end carbon dioxide emissions but rather to reduce them until the point at which the marginal benefit (in the form of lower climate change damage) is just equal to the marginal cost (in the form of slower economic growth because energy is more expensive, etc.).

JFT: Marcel Boyer, along with many economists and politicians, including conservatives such as James Baker and George Shultz, generally agree on the following points: (1) a carbon tax is the most effective lever to reduce carbon emissions at the scale and speed needed; (2) a carbon tax will encourage technological innovation and accelerate the development of low-carbon goods and services; (3) a sufficiently robust and progressively increasing carbon tax will replace the need for various emissions regulations and promote economic growth and investment in clean energy alternatives; (4) a carbon border adjustment system will improve the competitiveness of more energy-efficient domestic companies and encourage other countries to adopt a similar carbon tax; (5) To ensure the fairness and political viability of a carbon tax, all tax revenues generated should be returned directly to citizens through equal flat-rate rebates.

My question to you is: do you agree with those terms? If not, why?

RPM: I do not endorse the arguments put forth by Baker, Shultz, and other supporters of a « conservative case for a carbon tax. » I understand the superficial appeal of their approach, but in the end, I think it is a foolish venture that will not deliver the promised results.

One huge problem with their message is that, in reality, governments around the world have implemented carbon taxes and retained other top-down interventions, such as regulations on fuel efficiency and mandates on the percentage of electricity coming from renewable sources. So even if it’s true that implementing a carbon tax and eliminating all of the other climate-change-related policies would be a benefit, it’s a moot point because that hasn’t happened anywhere on Earth (to my knowledge).

Similarly, it is naïve to think political officials will get access to trillions of dollars in new revenue (through a carbon tax) and that they will simply return the money to citizens. In practice, governments have typically used the new revenue to fund « green » programs or to help reduce a pre-existing budget deficit.

One final problem I will mention: It is a technical issue but an important one. In the literature, they discuss the « tax-interaction effect, » which says that in the presence of distortionary taxes (such as taxes on labor or capital), even implementing a lump-sum rebate carbon tax can exacerbate the original problem. This means that, in practice, the « optimal » carbon tax should be set at a lower level than what the ostensible climate change externality would require. The arguments from conservatives in support of a revenue-neutral carbon tax typically are not aware of this subtlety. They think they would be making the tax code more efficient but actually, they might be making it worse (though the extra tax distortion would be partially offset by less climate change damage).

JFT: Your critically acclaimed book Choice: Cooperation, Enterprise, and Human Action published in 2015 popularizes Ludwig von Mises Human Action’s signature work. First published in 1949, it is a book of paramount importance in the history of ideas and economic thought. Why did you decide to dedicate an entire book to it? What does Mises have to teach us about energy and environmental issues?

RPM: In my opinion, Mises was the most important economist of the 20th century, and his magnum opus Human Action conveys his life’s work. The problem is that the book is quite massive, and the writing can be difficult, especially for young readers. Mises writes in a formal « Germanic » style (in English), assuming that the reader has read extensively on many topics.

Thus the Independent Institute approached me with the idea of writing a stand-alone book that would distill the essence of Mises’ treatise into a smaller version that would be accessible to college students. I think that we succeeded in Choice.

I actually don’t remember Mises writing too much on energy and environmental issues; I think perhaps because they weren’t considered as important in the 1940s (when Mises was writing his book) as other topics such as socialism versus capitalism. However, one of Mises’ key contributions is to point out the role of prices in helping entrepreneurs engage in economic calculation, which guides their activities. This mindset shows the problems with the government trying to micromanage the energy sector. Just as outright socialism doesn’t work well, so too does « planning » the electricity industry result in failure.