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"The Hans-Werner Sinn paradox" by Andrew Watt

I have just learned that Hans-Werner Sinn has taken on even weightier subjects than rescuing the euro area from its crisis. Back in 2007 Germany’s best-known economist wrote articles on saving not just Europeans but the whole of humanity, namely from climate change; these thoughts have now just appeared in book form in English under the title ‘The Green paradox‘, published by MIT press.

Sinn’s solution to the euro crisis, in a nutshell, was to kick out Greece, followed by other Club Med countries. The ‘euro area crisis’ would then be resolved, as it were by definition: the economic mess that would then face all the former euro area members would certainly have needed a new name. Judging by the publicity material for the new book on climate change, Prof. Sinn in no less forthright in his way of arguing when it comes to climate change. The problem is that he appears to be completely on the wrong track.

Again.

Hans-Werner Sinn on climate change: its the supply side, stupid

Western governments have failed to curb carbon emissions, we are told, because they have sought to limit the consumption of fossil fuels using all sorts of costly and distortionary measures. Instead we should

extract less of it [fossil carbon] from underground to start with. That would inevitably lead to less  fossil carbon being combusted.

No-one had grasped this crucial insight

… until Hans-Werner Sinn broached the idea in a series of scholarly papers in 2007…

and that is why climate-protection policies have been such a failure. Specifically,

By neglecting the supply side of the carbon markets, the policies against global warming simply disregard half of the market for fossil fuels and ignore the fact that the fossil resource owners are the real climate makers. By inserting fossil carbon into the carbon cycle by way of supplying it to the markets, enlarging thus the stock of carbon dioxide in the atmosphere, they determine the speed of global warming and, consequently, hold the fate of humanity in their hands.

A moment’s reflection shows this to be entirely wrong. If it were the oil producers – think Saudi sheiks – that determined the level of emissions, then what is the explanation for the fall in emissions during the economic crisis? Did the oil producers coincidentally decide to turn off the taps just when the global economy plunged? In the real world, the amount of oil pumped is driven by the physical demand for it at the current market price. The physical demand is affected by things like incomes and economic growth, and the quantity and fuel efficiency of  energy-consuming devices. The price is determined by the marginal cost, i.e. the cost of producing the last barrel demanded, and that in turn is set by the level of demand combined with technical supply-side factors.

But Hans-Werner Sinn has a different explanation for why the producers, who in his view are running the show, are pumping so much oil. It’s all the fault of – you guessed it – those misguided western governments and their feed-in tariffs and rules on light-bulbs, what he calls ‘green policy measures’ aimed at reducing consumption. In Sinn’s worldview, that may seem paradoxical, but it is obvious:

The resource owners regard the tightening of green policy measures with increasing concern, because they perceive them as a destruction of their future markets. Quite understandably, they try to pre-empt the expected wealth losses by extracting and selling their fossil fuels before their markets disappear. That is the Green Paradox: announced future reductions to carbon consumption may have the effect of accelerating climate change now.

Ok, here I really struggle to follow the logic here. Unlike in the previous paragraph, here it seems that Sinn sees western demand as the driver, and not supply. But it is future demand, he claims, that is key: because future demand is expected to fall, then present supply is (artificially?) ramped up.

Wow. Well, isn’t it eminently more plausible simply to assume that that oil sheiks are relatively short sighted profit-maximisers like everyone else. They don’t maximise their expected returns over the next infinite number of generations, even if some economic schools of thought think that everybody does (or should do). They just see that – to take extremes – oil in the ground means riding from one dusty tent to the next by camel, whereas oil pumped out of the ground can be converted into Bentleys, advanced weapons systems, welfare-induced quiescent populations, numerous wives, and all the other things that your average Saudi Prince thinks are necessary for the good life. They  pump oil to meet these ends. Or to keep the Americans on-side. Or whatever. (And the same applies to less colourful figures in places like Norway, even if their ‘needs’ are more prosaic.) One thing that is surely NOT driving oil-pumping policy is that they are petrified of the German or anyone else’s feed-in tariff ten or twenty years hence.

But that is not all. Then it gets really strange. The obvious policy question posed by Sinn’s ‘analysis’ is

But how can you induce resource owners to leave more carbon underground?

And the answer:

a swiftly introduced Super-Kyoto system, combining all consuming countries into a seamless demand cartel using a world-wide cap-and-trade system

But this obviously raises at least two fundamental questions. First, if this is really thought to be a realistic policy proposal then wouldn’t it, on Sinnian logic, be the mother of all incentives to pump oil like there was no tomorrow? If Sinn’s green paradox is real, we would be in oil up to our knees if a super Kyoto were, ahem, in the pipeline. And “every atom of carbon we extract from the ground ends up eventually as carbon dioxide in the atmosphere”.

On the other hand, if this super Kyoto is a utopian solution then all the fiddly, specific, freedom-limiting and costly demand-reducing measures that Sinn so disapproves of have to be seen in a much more favourable light. They are, in economist-speak, second-best solutions. But they are likely to be preferable to a first-best solution that is never going to be implemented. (For the record, I agree entirely that price-based carbon-reduction mechanisms are the way to go, but an EU-carbon tax with some form of border adjustment would be much more realistic and effective (see here, pdf))

In short Hans-Werner Sinn’s whole approach appears riddled with contradictions and problematic assertions. I say “appears” only because I am basing myself on the publicity material, but an author has no right to complain that people don’t read his book if the publicity material – which was produced by his own institute’s press service and not some penny-fiction publisher – is so dubious.

The Hans-Werner Sinn paradox

Which makes me wonder. Hans-Werner Sinn continues to be hugely influential in Germany, where he has a huge media presence, and also in Europe via the European Economic Advisory Group (EEAG). Yet he rushes into debate after debate, causes a commotion, but gets a bloody nose each time.

In 2003 he asked rhetorically Ist Deutschland noch zu retten? (whether Germany can be saved: English 2007), the title of a book in which he analysed the ‘malaise of the world’s first welfare state’ – the very welfare state (in the broad sense) that performed extremely well during the crisis and which now has one of the lowest unemployment rates in Europe.

Then it was the bizarre thesis that Germany had become a “bazaar economy” and was fast becoming a basket case. The analysis underpinning the bazaar economy idea was wrong (here on the facts and here for a critique of Sinn, beide auf deutsch), and the prediction, well we have seen how that turned out. Related to all this, he tried to claim that the so-called capital exports resulting from trade surpluses were somehow a loss to the domestic economy (refuted here auf deutsch).

Then it was kick Greece out of the euro area, one of the main justifications for which was that he pounced on the Target imbalances between the central banks of the eurosystem, making a number of claims that the the subsequent debate showed to be erroneous (see innumerable entries on vox.eu, Herdentrieb, Kantoos, several in English).

What seems to unite all these episodes is a flamboyant style, a resolutely micro-based approach, successfully convincing (German) voters and readers that they are losing hard-earned cash thanks to an array of dark forces ranging from trade unionists, to Greek pensioners to the eurosystem of central banks. Oh, and rapidly being proven wrong.

Call it the Hans-Werner Sinn paradox.

Reposted from02myEcon-01 02myEcon-01

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