Articles:
Pain and the solution to climate change

The debate over climate change has moved on—thank goodness. The gathering in Heiligendamm, Germany in early June of the leaders of the G8 rich industrial countries showed that there is no longer any serious dispute over whether to take action to reduce emissions of greenhouse gases. The debate is now about what to do, and how urgently. On diagnosis, there is consensus; but on action, there is confusion. That, at least, is progress.

            This does not mean, please note, that the science of climate change is actually now “settled”, as Britain’s outgoing prime minister, Tony Blair, said at the summit. It isn’t settled, because it can’t be. The planet’s climate is a hugely complex system. Scientists’ measurement of it remains quite primitive, and so does their knowledge of it.

There has been a flow of increasingly convincing evidence that global temperatures are rising and that human activity is one of the main causes. But the science is uncertain and there are respectable scientists who dispute the consensus that human-induced warming is occurring. Those scientists often get pilloried, especially by environmentalists. They shouldn’t be. Uncertainty is an essential part of science. So is debate and disputation.

Yet, uncertain though the science is, the argument for action really is compelling. Global temperatures are rising. So are emissions of greenhouse gas. It takes a long time just to stabilise the concentrations of those gases in the atmosphere, let alone to reduce them. Measures to reduce emissions should be thought of as one would an insurance policy or an effort at mitigation. That is the diagnosis around which a consensus has formed. If the world succeeds in reducing emissions substantially over the next several decades and then finds that human-induced warming is not in fact taking place, as the dissident scientists say, people are unlikely to be angry. They will be relieved.

That will not be true, however, if the measures taken to reduce emissions turn out to be very costly. Sir Nicholas Stern, a former chief economist of the World Bank and the man charged by Britain’s Tony Blair with convincing the world that the economics of climate change demand action, managed to make the costs look acceptable in his report in October 2006, but only by producing high estimates of the costs of inaction. The world could lose 5% of its GDP every year, he warned, if it fails to act on climate change; effective action could cost as little as 1% a year, he claimed.

Sir Nicholas should be an insurance salesman: his argument is like justifying the fire insurance premium by threatening to burn your house down if you don’t pay. The trouble is, that to accept the argument you need to know the true risk that a rise in temperature might occur. That is exactly what we do not know. There are no actuarial tables to guide us.

Time for taxes

That lack of knowledge of the true level of risk is one reason why governments have so far taken few real actions to deal with greenhouse gas emissions. Another reason is the fact that this is a global issue, for which each country’s individual actions are inadequate in the absence of worldwide agreement. Such agreement will now have to be sought, and it needs to be an agreement incorporating measures by the big emerging economies, especially China, India and Brazil, as well as by the rich, established polluters. Negotiations over such a global deal will fill up much of the next five years. But there is also a third reason for the lack of action. It is one that lies closer to home.

            This third reason is what might be called a paradox of political economy. It is that the type of government policy that will be the least economically damaging in the long run is the one that will be the most politically damaging in the short run. It is tax.

            From governments’ point of view, the range of approaches available to reduce emissions is simple: tax, subsidy or regulation. There is also exhortation, the effort to persuade citizens to change their lifestyles, but few are naïve enough to think this is a sustainable method to achieve environmental sustainability.

            It should be no surprise that virtually all governments that have taken any action have resorted to subsidy and regulation rather than tax. Subsidies—for biofuels, or wind and solar power, or just for research into new technologies—create groups of people and organisations that are grateful, and hardly any that are angry.

Using regulation to limit emissions does risk causing anger, which is why European governments have opted for a softer form of regulation, namely a “cap-and-trade” policy. This has produced a new and active market in the trading of carbon dioxide emission allowances, which makes lots of banks and other trading companies happy. But it will reduce pollution only if governments set a tough limit on total emissions, which so far they haven’t. Companies lobby against tough limits.

Subsidies and regulation might succeed in reducing greenhouse gas emissions in the long term, but only if the subsidies are large and the regulations are tough. That could impose heavy burdens on government budgets and hence the taxpayer. It also, though, would be an inefficient way to do it. To give the right subsidies to the right people, and to set the right regulations requires knowledge: knowledge of the best technologies, knowledge of consumers’ responses, knowledge of the likely consequences of a switch to particular new fuels. This is knowledge that governments do not and cannot have.

The one thing they do know—sorry, dissenting scientists, that they think they know—is that carbon dioxide and other greenhouse gases cause global warming. In economic terms, the most efficient—ie, least costly—way of reducing the emissions of those gases is to put a hefty tax on anything that produces them. The market—ie, human ingenuity—can then be left to work out what are the best low-emissions ways to avoid the tax. That may well include buying biofuels from Brazil. It is likely to be a better way than subsidising biofuels in America and Europe and suffering rising food prices as a result.

Tax is, however, the most politically costly method. It is upfront, in your face, or whatever the preferred slang might be. Voters hate it. The way around that should be to offer a compensating reduction in other taxes, either on income or on non-polluting activities that currently suffer sales taxes. The question, though, is whether voters will believe that the promise of compensation is sincere—and of course, sustainable.