Nobelist Krugman: Fear of carbon markets and speculation is “99% wrong and bad for the planet”

There are many obstacles to taking action on climate change. Most of those obstacles have deep roots: there are powerful interest groups that don’t want market prices to reflect true costs, and there are ideologues “” financially supported by these interest groups “” who don’t want to admit that sometimes the government has to intervene.

But there’s also, it seems, growing opposition to cap-and-trade from people who should be on the side of progress “” but whose reaction is basically “Eek! Markets!Wall Street! Speculation! Bad!”

We don’t need this.

So let me talk a bit about why this reaction is 99% wrong, and bad for the planet.

So writes Paul Krugman on his blog.  He is responding to Sen Byron Dorgan’s op-ed yesterday and my blog post on it (see “When Sen. Dorgan finds out what’s in the climate bill “” hint, hint, White House “” he might just support it“).  Of course, I only did an undergraduate “concentration” on economics — micro, macro, and “The Economics of Energy and Environment” — whereas Krugman has a Nobel-friggin’-Prize, so people should probably listen to what he has to say on the subject:

Any time you have a market, there’s some opportunity for speculation. Even if the good being traded isn’t storable, there may be a futures market, so you can bet on the future price. If the good is storable, the spot price may be moved by the futures market, since high futures prices may provide an incentive for stockpiling.

For example, the fact that wheat is traded means that there’s also a wheat futures market; and because wheat can be stored, futures prices affect spot prices.

So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. Yes, sometimes speculators will get it wrong “” but the advantages of having a wheat market vastly overshadow the possible harm that may sometimes come from speculation.

Now substitute “emission permits” for wheat. It’s exactly the same story. Why should you address it any differently? Yet as Joe Romm tells us, Sen. Byron Dorgan “” who I suspect kind of favors allowing the market in wheat to operate “” warns against cap and trade because it would offer too many opportunities to the “Wall Street crowd.” And that same line is, unfortunately, being echoed by a number of progressives.

[Note to self:  Woo-hoo!]

This is really bad “” it’s not a case of the perfect being the enemy of the good, it’s a case of the perfect being an enemy of the planet.

But wait “” don’t we have examples of energy markets being manipulated by speculators? Yes “” but the proposed cap-and-trade system would NOT reproduce the conditions of those markets.

The prime example of an energy market gone bad is the western electricity market in 2000-2001; and let me say that I have some moral authority here, since I called it when it was happening. That was the real thing “” but what made it possible was a combination of at least two factors. First, the demand for electricity was highly unresponsive to prices; second, the relevant markets were fairly small (northern and southern California were isolated both from the outside world and from each other by transmission bottlenecks).

In the case of emission permits, demand will probably be quite responsive to prices “” and the market will, as Joe Romm says, be huge.

What about the 2008 surge in commodity prices? Actually, I’m still of the view that speculation didn’t drive that episode “” a view backed by serious research. But even if you think that there was a speculative bubble, would that lead you to propose shutting down the market for crude oil?

By all means keep a watchful eye on speculators and regulate derivatives “” and make market manipulation illegal, as Waxman-Markey does. But don’t apply standards to emissions trading that you don’t apply to any other market.

The solution to climate change must rely to an important extent on market mechanisms “” it’s too complex an issue to deal with using command-and-control. That means accepting that some people will make money out of trading “” and that yes, sometimes trading will go bad. So? We’ve got a planet at stake; it’s crazy to cut off our future to spite Goldman Sachs’s face.


I would add that the oil price ran up in part because a lot of very knowledgeable people understand we’re peaking in oil and the “replacement” price for this non-renewable resource should be much higher (see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020” and “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015“).   Heck, look at how high the price is now and we’re in a major global recession.  So betting on a much higher price of oil is not pure speculation — it may be completely rational.

But the 2020 W-M is too weak and clean energy strategies — efficiency, conservation, wind, CSP, biomass, and fuel-switching to natural gas — are too cheap and abundant.  So betting on a very high CO2 price in the next decade makes no sense at all.   And, of course, the climate bill has provisions that make it impossible for the price to run up the way oil did.

Yes, railing at Wall Street speculators is a great populist pitch, but not a credible attack from those like Dorgan who say they believe in strong climate action.

16 Responses to Nobelist Krugman: Fear of carbon markets and speculation is “99% wrong and bad for the planet”

  1. pete best says:

    Fine, lets leave it to the markets then but does that guarantee that renewable energy sources will flourish or is there some meachnism that penalises high carbon energy sources in favour of low carbon ones. I was sumise that its in the recent cap n trade bill which allows countries and even states to trade their carbon emissiosn with each other whilst also cutting them back ?

  2. john says:

    Friedman, Krugman …You’re becoming the go to guy on climate for two of the most influential columnists on earth. Pretty good, Joe! I hope Dorgan and the others spouting this nonsense listen.

  3. Steve H says:

    ” So betting on a much higher price of oil is not pure speculation — it may be completely rational.”

    You hear that McCaskill? Do you really think the costs for farmers are going to go down? If anything, W-M will help to control costs by decreasing demand for fossil fuels.

  4. Jeff Huggins says:

    A Few Points, and a Note to Paul Krugman

    Thanks to both Paul Krugman and Joe for the great thoughts and wise advice. And great job, Joe, for bringing the matter to light.

    That said, I’d like to add a few thoughts for your consideration:

    First, in order for the broad public to “get” the central point here, it will have to be made much more simply and repeated, a lot. As I’m sure you both know, the public — including me — is “fed up!” with the excesses recently, and a few columns, using market-oriented terminology, are not going to put a dent in that feeling. Also, although it’s correct that markets involve all these things (mentioned in the pieces), they can and should be smartly regulated to discourage and disallow the extreme excesses that we always seem to see. As some of the work in psychology and behavioral economics shows, I believe, humans will often forego some benefit to themselves, even when they see it, in order to avoid a situation that they see as being grossly unfair, or in order to punish wrongdoers. So, it won’t be enough to tell people, “it’s alright.” The markets will also have to be structured and regulated so that the most unproductive excesses are disallowed and made criminal. And, the public will need to understand that. And wrongdoing will need to be brought to justice.

    Second, Paul mentions “interest groups that don’t want market prices to reflect true costs”. This point, or rather, the basic economic point underlying this point, also needs to be made much more clearly, and repeatedly, to the public. Far too many times, we hear the same people or interest groups or pundits say that “the totally unregulated free marketplace will solve the problem” AND, AT THE SAME TIME, say that “there shouldn’t be a price or cap on carbon”. Well, as we know, there’s a huge problem with that. It’s a problem in basic economics. Markets don’t acknowledge, care about, or deal with things that don’t have costs or prices. But, the people who make such an argument are often those who come across (to the public) AS IF they DO know what they are talking about. So, genuine and honest economists need to set this matter straight, in clear ways, and loudly, with the public. Indeed, in the recent pieces in The Economist, it’s mentioned that one of the problems in economics this recent go-around was that too many economists didn’t speak up when the problem was taking shape. Let’s not repeat that HUGE ERROR again. That error (not speaking up) is not merely one of intelligence, and indeed it isn’t (usually) one of intelligence. It’s even much worse: It’s an error in courage, will, and even (in some cases) ethics. So, speak up economists.

    Third, Paul or Joe write, “. . . it’s not a case of the perfect being the enemy of the good, it’s a case of the perfect being an enemy of the planet.” On this, I’d just like to offer a quick thought: If one interprets the phrase “the planet” in this statement as meaning, or including, “the sustainable health and continuance of life on the planet, including the environment”, rather than merely as the planet as a big rock, then “the good” and “the planet” approach being one and the same. In other words, it’s about life.

    Finally, a note specifically for Paul Krugman: Paul, The New York Times itself is dropping the ball, big-time, if you ask me. I enjoy and appreciate the columns (like yours) that express wisdom and urgency about the need to address climate change and related matters. But, the news coverage itself (of the matter) is dismal, and grossly insufficient to the importance of the task. Placement (the front page?!), frequency, use (or not) of graphics, clarity, and so forth are all WAY below what’s called for. More times than not, the “boxing match” is the focus — not clarity, context, or fact. And as I’m sure you must know, ExxonMobil places huge ads, frequently, in The Times that confuse, mislead, and blur the matter, BUT The Times doesn’t provide the clear straightforward truth, in context, to the public on those same topics, AND The Times treats ExxonMobil “with kid gloves”. If you don’t agree with that observation, you can do the analysis yourself just by analyzing the last two years of the paper. It’s plain as day. So, even as you personally write great pieces to educate the public on certain parts of the global warming and energy issues, the best thing you could perhaps do, in addition, is to march up to the exec floor of The Times and insist that they get their act together. The problem is glaring. The window of time is now. And you are one of the people who should bring this matter, passionately, to the attention of The Times’ leadership. Please!

    Well, thanks to both of you for the great post today.

    Be Well,

    Jeff Huggins
    HBS, class of 1986, Baker Scholar
    McKinsey and Company, 1986-1990
    Concerned parent and citizen

  5. Leif says:

    I would like to echo Jeff Higgins’ assessment of the Times coverage of global climatic disruption.
    Right on Jeff!

  6. Tim R. says:

    Any chance we are going to get commentary on today’s NYT editorial where they point out that one of two major flaws with ACESA is that it takes away EPA’s ability to regulate existing coal-fired power plants using the Clean Air Act. The editors have looked closely at the CAA and understand its potential in regulating GHGs and worry about the way ACESA ends that possibility. How could anyone not agree that this is a problem?

  7. Tim R.: see my comment under today’s news (which includes the NYT editorial) for my take on why it is not a problem to take away EPA regulation of coal plants. I am not certain about this, and I also asked for Joe’s opinion.

  8. Betting on lower oil prices may also be rational. Last week Phil Verleger predicted $20 oil and $1.50 gasoline by fall. Supporting cap/trade with an argument that scary high oil prices are imminent is risky because if prices are low or declining at some critical legislative moment you lose that argument and lose credibility on all your other arguments. We should make only cap/trade arguments that are valid no matter what oil prices do.

  9. Ric Merritt says:

    Well said, Jeff Huggins, all your points. I too am getting exasperated with the NYT (to which I have been addicted for decades). Of the two “hot buttons” climate and peak oil, climate is the more fundamental, though both are aspects of a larger whole. It is worth observing that the NYT (non-)coverage of peak oil is even more blinkered and inexcusable than that of climate. With climate, at least the editorial page is earnest and on the right track, when they bother to say anything about it. The paper as a whole, as you note, is 2 or 3 decades behind in conveying importance and urgency. Some blog comments, including on NYT’s own blogs, and some unpublished letters to the editor are not enough to change this, as I can attest.

  10. Mark Shapiro says:

    Jeff (and friends) –

    AS you know, Joe has been banging on the NYT drum for quite a while now. At least Tom Friedman and Paul Krugman are allowed to speak out. (Joe Nocera, with a boot-licking piece on Exxon a few months back, was the worst in my memory.)

    My hope: that NYT turns the corner — right after the last check from Exxon clears.

    But as Jeff points out, it would only be a start.

  11. max says:

    the newspaper business suffers from misaligned incentives-its revenue is from advertising but the interests of the advertisers are not aligned with the interests of news consumers to learn the news.

  12. Jeff Huggins says:

    Thank you Leif, Ric, Mark, and Max, for your comments. I guess we (including Joe and many others) need to keep at it when it comes to urging the media to improve and providing the reasons — rather clear by now — that they should improve.

    Cheers for now,


  13. Pat Richards says:

    Well, since Ms. Zelljadt of Point Carbon offered a detailed explanation of the UN certification process, I have to admit that I now feel better about the ability of the UN to verify and monitor their carbon offset projects to insure those projects are actually reducing the full amounts of GHG they get credit for on paper. (see the comment section at )

    But can anyone blame people for being skeptical of creating a whole new trading market in the U.S. after the disastrous failure of monitoring and regulation of the existing markets in this country over the past several years? A couple $ trillion dollars of fraud naturally tends to make one shy about these things, after all.

    I remain unsure on the details of how the new U.S. carbon trading market will address the complex issues of monitoring and verification. Will the UN or some identical process be verifying, creating and monitoring the carbon offset projects in the U.S.? It seems to me that the W-M Climate Bill will simply create a massive amount of the initial credits “out of whole cloth” at the stroke of the President’s pen when he signs the bill into law.

    Can anyone explain to us why the U.S. offset credits will be as real and reliable (as actual verified reductions of the full amount of CO2 reduction they represent on paper) as those which the UN has been issuing on its CDM projects?

    This is important because if we don’t have rock-solid verified 100% reduction of the CO2 reductions claimed on paper for every credit traded on the market, then what the market will end up doing is trading “sub-prime emission credits” for full price (i.e., buying and selling something that is supposed to represent 100% of X amount of CO2 reduction but which actually only provides 70% or 50% of X amount of reductions in the real world).

    [JR: I think U.S. offsets will be much better than CDM, since Waxman-Markey has very strong oversight authority and strict requirements for quality, additionality, and verifiability.]

  14. glen says:

    When I read Krugman’s “We’ve got a planet at stake; it’s crazy to cut off our future to spite Goldman Sachs’s face.”, I was reminded by this article in the Washington Post yesterday:

    Just today GS paid the Treasury Department 1.1B to buy back the stock-purchase warrants:

    [JR: Taxpayers made >25% return on GS investment. Not bad.]

    I think it is this type of behavior that bothers the politicians and the public the most.

  15. “there are powerful interest groups that don’t want market prices to reflect true costs”

    Thank goodness for this article, as I was thinking I was gong mad. At least other people can see it too.


  16. David Levy says:

    The critical question is whether the particular carbon market structures being developed will in fact deliver the carbon reductions we urgently need. See my own blog post on this at – Carbon Markets to Serve the Planet. If business is to commit large scale resources to long-term investments in carbon reduction, then the carbon price signal has to be strong and reasonably predictable. The financial firms building carbon markets have a vested interest in market instruments that are complex, opaque, volatile, and hard to value. It’s not looking like a market that will give the clear and simple price signals needed to stimulate a broad transition to a low-carbon economy.

    Krugman defends cap-and-trade on the basis that climate is “too complex an issue to deal with using command-and-control.” The irony here is that although cap-and-trade is viewed as the centerpiece of climate policy, policymakers in the US and Europe know that carbon prices high enough to do anything are currently politically unacceptable, so they are relying primarily on command-and-control style policies to reduce greenhouse gas emissions in the next decade.