“Market forces are not enough to halt climate change.”

2024 07 03

https://www.ft.com/content/b2b6fb7a-9477-4485-a9e3-435b5e9c987e?emailId=c3c691f4-e724-4aad-b021-133029f76532&segmentId=7d033110-c776-45bf-e9f2-7c3a03d2dd26

It is disappointing that a knowledgeable person like Wolf thinks it is necessary to state, “Market forces are not enough to halt climate change.”  As he very well knows, that is the essence of an “environmental” problem, of a negative externality.  This occurs when someone carries out an activity in a way that harms others by more than benefit that person receives from causing the harm.  In simple enough cases, tort law can handle this with a judgment that requires the first person to reduce the production of the harm and possibly paying for measures to reduce the harm caused.  This clearly does not work for the emission of CO2 into the atmosphere.

In these more complex cases public policy can step in to regulate or tax the activity that causes the harm until the benefit of causing harm is equal to the cost of the harm caused.  But this is not easy.  First it is difficult to determine what this optimal amount of harm is since both the beneficiaries of the harm and those harmed are dispersed and heterogeneous and difficult to determine how to cause the beneficiaries to reduce the (beneficial to them) activity by the collectively optimal amount.  In the case of emission of CO2 and methane into the atmosphere, this means creating these enormous climate-economic models to solve for the minimum present value of the harms of the emissions.  Since full optimization is too difficult, in practice these models solve for some approximate goal such as net zero emissions by 20xx or total increase in global temperature of no more than Y% by 20xx.

But creating these models is easy compared to determining the set of policies that will lead emitters of CO2 and methane collectively and over time to reduce their emissions to levels (maybe to zero) necessary to achieve those goals.  But even that is easy compared to the problems of political economy of enacting those policies.  As Wolf with classic British understatement says, “people just do not want to pay the price of decarbonising the economy.”   This is hardly surprising. The costs that people see are obvious and immediate; the benefits are diffuse and partially in the future.

In the face of this difficulty, environmentalist have adopted the strategy of exaggerating the costs of inaction (although for most, the exaggeration may be sincere, not “strategic”) and hiding the costs of action.  Doing good by stealth is not always bad, but in the case of reducing CO2 emissions it unfortunately means that the costs of reducing emissions are higher than necessary.  [And among the highest cost ways of hiding the costs is to attempt to block specific fossil fuel production, transportation or export projects.

See:  https://thomaslhutcheson.substack.com/p/why-not-lng-exports ]  

The bottom line is the current approach is just not working.  “Here is a sobering fact: in 2023, the production of electricity generated by fossil fuels reached an all-time peak. The share of electricity produced this way did fall, from 67 per cent in 2015 (the date of the celebrated Paris Agreement) to 61 per cent in 2023. But global output of electricity jumped 23 per cent in those eight years. As a result, even though generation from non-fossil-fuel sources (including nuclear) rose by an impressive 44 per cent, that from fossil fuels rose by 12 per cent.”

Wolf continues, “Until recently, I still hoped we could be lucky: market forces (plus massive investment by China) might drive the world towards renewables fast enough.”  I think he actually means market forces plus the high-cost hidden incentives in place and in prospect following the paradigm of successive COPs would be enough. See: https://thomaslhutcheson.substack.com/p/cop-28-and-counting

But even with this clarification, Wolf was wrong and he now agrees.  “…Some combination of heavy [net!] carbon taxes, long-term subsidies and changes in the design of electricity markets will be needed.”

I hate to quibble [Liar!  You know you love to quibble. 😊] but the following is not quit right. “As Lord Nicholas Stern and Joseph Stiglitz argue in Climate Change and Growth, among the most important problems in this area is the failure of capital markets to price the future appropriately.”  They do say “among,” but in a way, that is just another aspect of the failing to properly price emissions, of the need for a proper trajectory for the tax on net CO2 emissions.  I do agree, however with, “The market will not fix this global market failure. But today’s political fragmentation and domestic populism make it almost inconceivable that the needed courage will be forthcoming either. We talk a lot. But we find it effectively impossible to act on the needed scale. This is a tragic failure.” 

I would add that the place to begin addressing this failure is with environmentalists.  Until they recognize that the present strategy is not working and begin to advocate for taxation of net emissions of CO2, we cannot expect politicians to act.

[[ DAL-E apologizes for the poor execution of my Image Prompt: “Please create a split good/bad environmental scene with little dollar signs raining down on the “good” side. ]]

[Standard bleg:  Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail.  I would welcome comments on these views.]