Thursday, February 08, 2007

What is to be done?

The economic response to the growing scientific consensus on global warming seems naive and inconsidered. After reading a Robert Samuelson op-ed, I can think of many reasons why a global Pigouvian tax (or cap and trade system) is not going to happen:

  • developing countries will not stand for it (and in any case economic growth is, rightly, much more important for them than global warming);
  • governments are subject to a time inconsistency problem (there will be incentives to lower energy prices in the future) which investors can forecast and hence will be reluctant to invest in new technologies; and
  • even if a global scheme is agreed upon I have not seen a convincing explanation of how you will measure how much carbon different firms are emitting.

In the face of this I think the simplistic arguments for cap-and-trade or a carbon tax are naive. Instead, governments have to rely on more direct and targeted interventions that do not rely on an unstable transmission mechanism. For example, governments could invest in clean-coal, nuclear or other carbon reducing technolgies (given the public good characteristics of innovation this could equally help 'correct' the behaviour of developing countries). For enforcement reasons, instead of putting an explicit tax on carbon it may have to tax products which use a lot of carbon (such as petrol, cetain metals, etc). I'm not really sure on the relative merits of such options but they seem much more attainable and realistic.

1 comment:

Luke Baker said...

Just found this site.....Matt, I believe these environmental schemes have some massive shortcomings in their design / execution. Although I am certainly no expert on the matter, the cap-and-trade system for carbon emissions exposes a number of serious issues, both in regulation and enforcement.

Maybe I am too cynical, however enforcement of these cap-and-trade mechanisms just seems impossible... You are essentially relying on the honesty of big business and Governments, that the monitoring / enforcement is accurate, and I don't know that Governments would be willing to put up their hand and declare 'You know what, we messed up! Penalise us, and we PROMISE to try harder next time.' This leads onto the issue that changing existing practises, and inventing new 'greener' technology costs industry a massive amount in R&D dollars. Is it more likely then, that some mistruths regarding emission levels will be told, or that big business would 'flip the bird' at the regulators, as the penalty is cheaper than upgrading the necessary technology.

What about the disparity in assessing a nation's standing in the required scheme. With the Kyoto protocol, China, a massive region for carbon emissions has no legal requirement for lower emissions....But I am sure they will try REAL hard. Having this 'equality isnt about treating everyone equally' attitude is not helpful in driving these schemes forward.

Big businesses such as the Chemical Industry are constantly opening factories in these developing countries, and why not? If they are rewarded for doing so with cheap labour and a free reign on emissions...who wouldn't.

No one likes to lose, so I can't believe that these big businesses / Governments will be so ethical as to invest huge amounts of capital only to be penalised later for exceeding the emission target.

I don't blame Howard for not ratifying the Kyoto protocol, it is not in Australia's best interests to do so, until there is some better mechanism for the lowering of greenhouse gas emissions. Australia has copped a lot of flak over not signing this particular agreement, however, although Australian emissions may be high per capita, its tiny population and incredible land mass, creates a negligible effect on global emissions. Meanwhile other nations such as China can sit back, laughing whilst raking in profits from companies opening factories there to dodge cap and trade in their home nations.

I think that unless there is an organisation ala the UN, including members from all participating nations undertaking regulation and enforcement (which I am still not sure would help), maybe the tax must be burdened by the consumer.

I'm ranting. I am not an economist, just p!$£ed off.