Home > Policy > A modest proposal on climate change

A modest proposal on climate change

December 23, 2011 Leave a comment Go to comments

There are, as I see it, two really big and profound problems with the way we’ve gone about trying to reduce greenhouse gas emissions. The first is that at the level of the individual, it is surprisingly complicated to figure out how you can minimise your own carbon footprint. For electronic products, it has been argued that carbon footprint is actually impossible to measure. I doubt most people understand the massive carbon savings of buying a fuel efficient used car, rather than a new hybrid. It is completely unreasonable to expect people to make these calculations for everything they buy. Furthermore, merely making low-carbon options available to people will not in and of itself do much to reduce emissions from current levels, for essentially the same reason that increasing road capacity or even other forms of transportation doesn’t reduce congestion. It’s all about the price of the thing you are trying to get rid of – hence why congestion charges have worked to reduce traffic in places like London and Stockholm, and merely building new roads hasn’t worked anywhere.

The second problem is that the way we’ve been going about trying to reduce emissions – getting governments to agree on targets by some date – creates an enormous incentive to negotiate down the size of your particular countries emissions, and then to cheat on it. This is because there is an economic cost to doing this, and merely trying to achieve it through blunt regulatory mechanisms means that it is attractive for any individual country to cheat a little, and reduce the cost of doing carbon-emitting business there. You can think of it as a kind of carbon cartel, and is subject to all the problems that bedevil cartels – and more, because limiting production doesn’t give you any tangible monopoly rents. it doesn’t take a genius to realise that if this is the best we can come up with, then we’re completely screwed.

Thankfully, I think there is a solution to this that covers both these problems. My modest proposal would be to eliminate all taxation and replace it with a carbon tax, assessed at the earliest possible point in the production chain (i.e. energy produced within the country, and the carbon footprint of all imports). In order to account for the fact a carbon tax is more regressive than current taxation, I’d establish a citizen’s income. As the amount of carbon used within the country naturally falls and the tax revenue with it, I would replace the lost revenue with a gradual phase-in of the previous tax regime*.

The beauty of this plan is that it will result in individuals re-allocating towards a consumption basket lighter on carbon, merely through the fact carbon has become really expensive. No one has to calculate the carbon footprint of anything (other than imports), because the price of the carbon will be passed down from point where it was assessed into the prices of final goods. Hayek was very wrong about some really important stuff, but his idea that prices reflect information that would otherwise be incalculable to individual agents is one of the most brilliant insights of the last 100 years.

Furthermore, whilst this plan would be terrible for carbon-intensive industries (as it ought to be), if you were the only country to do this then every low-carbon business in the world would want to re-locate to your country. Whilst ‘competitiveness’ on the carbon front would be terrible, for every other kind of economic activity you will have to put the ball in everyone else’s courts in order to make low-carbon industries more attractive in order to prevent them moving. In short, I think my proposal has a healthy rather than perverse ongoing dynamic, by taking what is currently a race to the bottom (countries trying to shirk their obligations) and turning it into a race to the top (through incentivising low-carbon business and industry).

I haven’t thought through all the aspects of this yet. It’s just something that has been stewing in the back of my mind for a while, warmed by my deep dissatisfaction with all the ‘solutions’ people have been talking about. I’m not in a position to comment on how worried we should be about climate change, but if we ought to be as worried as the experts seem to be, then we need to start coming up with ways to drastically reduce our carbon emissions that will actually work. There is something in my plan for everyone… other than industries that heavily rely on carbon emissions. Given that the professional consensus among economists is that consumption taxes are the most efficient, I really struggle to think of any economist who would prefer the current tax regime to this.

I don’t in any way see my ‘plan’ as anything remotely close to a finished product, and I’d really like to hear people’s reactions to it. But it does seem (at least to me) to be a lot better than anything anyone else is talking about.

 

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*I say this just to make it less controversial. In reality, I also hope it would lead to a vigorous debate as to how we should reconstruct the tax code from scratch. Conservatives, you should absolutely love this part

 

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