Why the Status Quo Matters

In an earlier post, I listed some questions for interventionists to consider before advocating their interventions.  This is part of my ongoing crusade to get interventionists to think about things as they actually are as opposed to a blank slate.  These two modes of thinking I call “status quo reasoning” (seeing the world as it is) versus “state of nature reasoning” (seeing the world as a blank slate).

Some recent research demonstrates the importance of status quo reasoning.  In a new working paper at the National Bureau of Economic Research entitled “The Market and Climate Implications of U.S. LNG Exports” James Stock of Harvard University and Matthew Zaragoza-Watkins of UC Davis examine how the US moving from a net importer of natural gas to a net exporter has affected greenhouse gas emissions.  For a while after fracking began in the US, natural gas prices became disconnected from other energy prices as the US market was flooded with natural gas and export options didn’t really exist.  However, over the course of 2012-2016, approvals were granted and LNG export terminals were built, allowing the US energy companies to export LNG around the world.  By tapping into the global market, US natural gas prices “reconnected” to world energy market prices: natural gas prices rose and began moving in tandem with oil and coal, as has been the historical trend.  

What is interesting is their discussion on climate effects.  In their abstract, they write:

Many supporters of a carbon tax erroneously claim there is no price on carbon. That is the fallacious “state of nature” reasoning I discuss above. In the state of nature, there is no price of carbon. But in the real world, there is a price on carbon.  There may not be a monetary price, but there is always some form of price.  When natural gas (a considerably cleaner producer of energy than oil and coal) entered the market, carbon use fell.  Furthermore, as the price of natural gas coupled with other energy prices, people economized on natural gas usage (which, though cleaner than other sources of energy, still releases CO2), as well as on oil and coal.  All in all, the effect of this was a reduction of carbon emissions as if a carbon tax was applied!  The market, quite unintentionally, helped solve the externality by imposing a price on carbon.

What’s more, this market alternative to carbon taxes is probably, on net, more efficient than a similar carbon tax.  That is, even though this coupling had the same effect as a $30/ton carbon tax, it likely did so with less waste.  Whenever we talk about public policy, we must discuss the political process and how the sausage is made.  Politics is a messy business, and imposing a carbon tax is no different.  Even if we assume that the tax is passed costlessly and without any political shenanigans surrounding it, there are still the administrative costs of the tax (that is, any cost incurred while administering the tax: hiring people to collect it and calculate it, audits, and so on), which reduce its effectiveness.  But with this market process, those potential costs do not exist.  

In a state of nature, the interventionist could propose a carbon tax too high (or too low).  But, taking the status quo into account, in looking at the total effects and not just the marginal effects (as Ronald Coase stressed so long ago in The Problem of Social Cost), we have a much clearer picture of what interventions may be necessary and which may not.