Does carbon pricing work in practice?

Not according to a new meta-analysis out from Jessica Green in Environmental Research:

Carbon pricing has been hailed as an essential component of any sensible climate policy. Internalize the externalities, the logic goes, and polluters will change their behavior. The theory is elegant, but has carbon pricing worked in practice? Despite a voluminous literature on the topic, there are surprisingly few works that conduct an ex-post analysis, examining how carbon pricing has actually performed. This paper provides a meta-review of ex-post quantitative evaluations of carbon pricing policies around the world since 1990. Four findings stand out. First, though carbon pricing has dominated many political discussions of climate change, only 37 studies assess the actual effects of the policy on emissions reductions, and the vast majority of these are focused on Europe. Second, the majority of studies suggest that the aggregate reductions from carbon pricing on emissions are limited – generally between 0% and 2% per year. However, there is considerable variation across sectors. Third, in general, carbon taxes perform better than emissions trading schemes (ETSs). Finally, studies of the EU-ETS, the oldest emissions trading scheme, indicate limited average annual reductions – ranging from 0% to 1.5% per annum. For comparison, the IPCC states that emissions must fall by 45% below 2010 levels by 2030 in order to limit warming to 1.5 degrees Celsius – the goal set by the Paris Agreement (IPCC 2018). Overall, the evidence indicates that carbon pricing has a limited impact on emissions.

Geopolitics and the energy transition

From today’s big read in the FT:

But is the geopolitics of energy really about energy?

To link geopolitics and conflict to a particular material thing is to miss the point a little. There is not a fixed set of objects we fight over, such that the sudden super-abundance of one reduces conflict as a whole. Humans have fought wars over salt and spices, cotton and coal. Better shipping routes to the spice islands, or alternatives to coal did not eliminate conflict so much as displace it elsewhere. Tensions arise over the valuable, the scarce, the unevenly distributed (and much else). A geopolitics of carrots is possible should they meet those conditions.

Instead we should be asking, what things and places meets those conditions in a world where energy is super-abundant. What do societies with an abundance of energy make, do, and look like? What will they care about, be willing to risk lives and treasure for? One thing missing from the article is services. Geopolitical thinking is still deeply attached to the material world, but we need to understand how increasingly digital (dematerialised?) and service driven societies change traditional geopolitics (if at all)?

The article outlines some of the new(ish) commodities that will power the renewable revolution, like cobalt and copper. This in turn will shift the geography of geopolitics, perhaps the corridors of electricity transmission will replace the sea-lanes transporting oil (and perhaps I was overhasty in criticizing those who think Eurasia is the future of geopolitics).

Well worth reading!


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Macro economists argue over higher inflation (again)

Prominent macro economists are divided over whether the Biden administration’s proposed $1.9 trillion stimulus bill is likely to stoke inflation and curb future investment.

In a Washington Post op-ed on Friday, former United States Secretary of the Treasury, Larry Summers, argued that the $1.9 trillion stimulus bill risked overstimulating the economy and stoking inflation. Summers argued the program, mostly short-term spending to counter the effects of the COVID-19, could also consume political and economic space required for the long-term investments.

“The Biden plan is a vital step forward, but we must make sure that it is enacted in a way that neither threatens future inflation and financial stability nor our ability to build back better through public investment,”said Summers.

On Saturday, former IMF Chief Economist, Olivier Blanchard, backed Summers in several tweets.

Critics argue their fears are overblown. Counter-arguments fall broadly into three categories: firstly, inflation is less responsive to employment than it once was, secondly, it is difficult to estimate what constitutes excess stimulus, and, thirdly, that long-term investments could pay for themselves.

Inflation is less responsive to employment than it once was

Summers op-ed comes at a time when a vocal minority of economists are warning of higher inflation due to the combination of loose monetary policy, fiscal stimulus, and household’s pent-up savings.

In contrast, Nobel Prize winner Paul Krugman argues that stimulus is unlikely to cause unsustainable inflation. His argument hinges on the Phillips curve, the supposed inverse relationship between inflation and unemployment which has guided macroeconomic policy making since the 1960s. For decades, economists thought targeting low unemployment with stimulus would only accelerate inflation, as in-demand workers bargained for higher wages, and raised prices.

Krugman points to new research which suggests that the Philips curve is actually “flat,” and low unemployment is unlikely to significantly increase inflation. As long as the Federal Reserve keeps inflation expectations stable, there is little risk a “hot” economy will generate inflation by itself.

Markets show no sign of expecting higher inflation. According to David Beckworth, Senior Research Fellow at Mercatus, “Markets have skin in the game and have already priced in a large Biden relief package. And yet, no evidence of overheating as far as the eye can see.”

Others, like Slate’s Jordan Weissmann, argue that the structural conditions for inflation are weaker now than in the past. Global supply chains, alternatives to oil, weak unions, and independent central banks mean low unemployment is unlikely to translate into higher wages and prices quickly.

The difficulty in estimating the output gap

In a recession, government stimulus hopes to close the “output gap” between what economies can hypothetically produce – “potential output” – and reality. Theoretically, too much stimulus could exceed potential output and lead to inflation as companies scramble to meet outsized demand.

But for sceptics, measures of potential output are notoriously unreliable; it cannot be observed directly, only retrospectively. The Congressional Budget Office, which produces these estimates, has been wrong before. As a result, Summers’ critics treat his claim that the proposed stimulus will be excessive with caution. “Nobody actually knows what our potential output really is,” said Weissman.

Self-financing long-term investments

During Biden’s Presidential campaign, a $2 trillion dollar plan was announced to accelerate the transition to clean energy. For summers and others, the size of the COVID-19 package will exhaust the economic capital needed for those long-term investments.

Others have responded by arguing investments into climate, transport, and infrastructure pay for themselves. “Compared with other major infrastructure projects in U.S. history, and these projects will give back more than they cost,” said economist Noah Smith in a recent Bloomberg column

These debates take place in the shadow of the Obama administration. In 2009, concerns about debt led the administration to downsize its post-financial-crisis stimulus. For some, the slow recovery cost Obama control of the House in 2010.

The Biden administration wants to avoid a similar situation by going big straight out the gate. Summers’ role in rejecting proposals for a larger stimulus package in 2009 have made him a target for a new generation of progressive economists. Expect these debates to continue.


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Do economic sanctions work? And a poem by Bertolt Brecht.

A convoy of military trucks speeds past. Armed men are disgorged outside parliament. TVs play patriotic music. Facebook goes down. Men in uniform grace local street corners. People are arrested. The patriotic music is interrupted to announce that General so-and-so is dissolving parliament to protect the constitution/democracy/the people. Condemnation follows from the democratic world.

Image result for military coup in myanmar

There has just been a military coup in Myanmar. In addition to widespread condemnation, the US and some of its allies are also discussing sanctions.

Economic sanctions are an attractive proposition. They apply pressure to the leadership by closing their Swiss bank accounts, and cutting their economy off from the world. The resulting economic decline causes people to vent their frustration at the regime, who then presumably restore the constitution/democracy the people. All this without any shooting or bombing!

Critics argue sanctions often leave the leadership unscathed while the population struggles with rising prices and goods shortages. The people with guns still eat well and live in nice houses, while the rest are pushed into poverty – and they still can’t vote.

What does the research on sanctions say? I’ve read through the papers so you don’t have to.

Here are some key points:

  • It can be difficult to determine if a sanction has worked or not, especially since they are often combined with other policy tools. It can be difficult to disentangle whether the target state changed their behavior because of an economic sanction, diplomatic effort, or the threat of a military intervention? A classic work in the field – Economic Sanctions Reconsidered – argued that between 1914 to 1990, sanctions worked in 40 of 115 cases, for a 34% success rate. Critic Robert Pape argues they incorrectly coded many examples, and the true figure is more like 5 of 115.
  • For Pape, sanctions cause enormous human suffering, and can increase the likelihood of conflict because policymakers “may escalate in order to rescue their own prestige.”
  • What about “smart sanctions,” those that narrowly target elites and their power base? Reviewing the use of specialized financial sanctions against Sudan, Russia, and China, the authors said: “rarely has so powerful a force been harnessed by so many interests with such passion to so little effect.”

    The consensus is that smart sanctions are relatively ineffective, but are an easy political option for countries which want to act, but do not want to go to war, or be accused of causing mass suffering in target countries.

What is the international community to do then? Diplomacy, perhaps through those states best positioned to exert pressure, like China. Humanitarian support, to the degree that it can be provided without simply enriching elites. Otherwise, the outlook is rather grim for those hoping for a quick solution.

In the words of Robert Pape:


Finally, I am reminded of Bertolt Brecht’s famous poem, The Solution, following the 1953 uprising in East Germany

After the uprising of the 17th of June
The Secretary of the Writers’ Union
Had leaflets distributed on the Stalinallee
Stating that the people
Had forfeited the confidence of the government
And could only win it back
By increased work quotas. Would it not in that case be simpler
for the government
To dissolve the people
And elect another?


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India, supply-side econ, and gender discrimination

Three interesting links (thanks to Marginal Revolution):

Supply-side economics and progressives are rarely found together, which makes this short article on the topic all the more interesting.

You might recall the piece I wrote about the ongoing land protests in India. This Q&A covers the politics and economics in great depth. Recommended for further reading.

A new econ paper out:

This paper reports the results of the first systematic attempt at quantitatively measuring the
seminar culture within economics and testing whether it is gender neutral. We collected data on
every interaction between presenters and their audience in hundreds of research seminars and job
market talks across most leading economics departments, as well as during summer conferences.
We find that women presenters are treated differently than their male counterparts. Women are
asked more questions during a seminar and the questions asked of women presenters are more
likely to be patronizing or hostile. These effects are not due to women presenting in different fields,
different seminar series, or different topics, as our analysis controls for the institution, seminar
series, and JEL codes associated with each presentation. Moreover, it appears that there are
important differences by field and that these differences are not uniformly mitigated by more rigid
seminar formats. Our findings add to an emerging literature documenting ways in which women
economists are treated differently than men, and suggest yet another potential explanation for
their under-representation at senior levels within the economics profession.

The FOMC meets and, among other things, we discover Jerome Powell has been vaccinated

The FOMC met for the first time in 2021 yesterday. The committee has maintained its accommodating policy stance as the economic recovery slows in the US.

Chair Powell hanging on for dear life like the rest of us

As at the last meeting, the Fed expects to keep this in place for some time:

With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.


The Q&A session with Chair Powell had a few interesting nuggets:

  • He addressed the ‘burst of inflation’ hypothesis (discussed by me here), arguing that any inflation this year is likely to transient and minor“we think its very unlikely that anything we see now results in troubling inflation.” And, even if it did appear, “we’re going to be patient. Expect us to wait and see, and not react.”
  • With the ongoing Gamestop frenzy (expect a write up soon…), there were lots of questions about markets, macro-prudential regulation, and ultra low-interest rates. He reminded everyone that with 9%-10% unemployment, the Fed will continue to prioritise jobs over hedge fund tears.
  • One of the striking parts of the Fed’s language in recent years has been the recurring emphasis on employment, jobs, and minorities. Inflation increasingly feels like a side-show. This conference was no different, Chair Powell discussed joblessness in almost emotive terms.

We’re not just going to look at the headline numbers. We’re going to look at different demographic groups, including women, minorities, and others. We’re not going to say we’ve reached full employment, which is our statutory goal, until we have reached maximum employment. Which you haven’t if there are lots of pockets of people not participating or not employed in the labour market.

We want an economy where everyone can take part, can put their labour in, and share in the prosperity of our great economy.

I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they’ve built because they don’t get back to work in time. I’m more concerned about that, not just to their lives, but to the US economy. I’m more concerned about that than about the possibility – which exists – of higher inflation. Frankly we’d welcome slightly higher, somewhat higher, inflation. The kind of inflation that people like me grew up with seems far away, unlikely, in the domestic and international context we’ve been in for some time.

This shift in emphasis was partly forced on the Fed. Persistently low inflation despite falling unemployment shone a spotlight on the full employment side of the Fed’s mandate. Its similar elsewhere; as central banks took on on ever larger roles in economic management following the GFC, they needed to maintain legitimacy with a public concerned about joblessness and inequality, not inflation.

From my own analysis of language in all central banking speeches between 01/2007-01/2020

This language creates precedent which could constrain, or influence future Fed decisions, or at the very least, how they are presented and framed. This could have long-term consequences. It is said that the experience of inflation in the 1970s/80s shaped the minds of a generation of economists and policy makers. The Fed’s new attitude and language may have a similar effect on its institutional culture. Might there be a dovish, employment bias, for years to come?