The recent announcement by Canada’s Minister of the Environment, Catherine McKenna, that there will be a national carbon price by the end of the year, is extremely welcome news. As someone who has spent a great deal of time trying to articulate to the public the basic rationale for carbon pricing (here, here, here and here), this is about as close to a “win” as anyone could reasonably expect. Let’s hope it happens.
Most of the time that I spent writing about it, I was trying to explain very basic features of the policy (what a collective action problem is, how the price system works, why it’s not a “tax on everything,” etc.) This was aimed primarily at a right-wing audience, of people who were inclined to do nothing about climate change. I have spent comparatively less time addressing a left-wing, or environmentalist audience, explaining why pricing is an appropriate policy measure in this case (although there was this and this).
(On the general issue, of when we should be using pricing, and when we should favor more “deontological” approaches to environmental policy, I continue to recommend John Braithwaite’s paper, “On the Limits of Economism at Controlling Harmful Corporate Conduct.”)
There is, however, a very reasonable question that arises about carbon pricing, which is not often enough addressed. The mainstream view on carbon pricing is that there should be a tax imposed of approximately US$30 per carbon-tonne (carbon-tonnes being the generic unit used to measure all greenhouse gases.) This is enough to raise the price of gasoline by approximately 10 cents per litre. The obvious question is how such a small increase could possibly be an effective response to the problem of climate change.
There is one version of this argument that rests on a failure to understand the idea that price changes affect behaviour at the margin (which I discussed here). But set that aside, and just consider the facts as they now stand. Two years ago, when the evil Harper Government was in power, gas cost more than $1.20 per litre. Now it’s selling for less than $1 (here in Ontario). So how is raising the price of gas to $1.10 per litre going to bring about an environmental utopia? If climate change is the big threat that it’s made out to be, shouldn’t the price of gas be going up to $3 or $4 per litre?
In other words, the question is, “why are the carbon taxes being proposed, and adopted in jurisdictions like BC, so low?” (see recent report by Ecofiscal Commission on relative stringency of carbon policies in Canadian provinces here).
That is a great question. It’s also one that has an answer (in fact, several answers), although it gets a bit complicated. The technical, but relatively uninformative answer is that the US$30 (actually, more like US$33) represents the best estimate of the “social cost of carbon” (SCC) which is to say, the value of the damage caused by the release of a single carbon-tonne of emissions. So a carbon price in that range “internalizes the externality,” making it so that the private cost of using energy derived from fossil fuels is approximately equal to the social cost.
However – and this is a big however – in that calculation of the social cost, an enormous number of judgements are being made about how much we should be concerned about the various consequences of our actions. What follows is a quick list of some considerations that speak in favour of doing less than the maximum possible to reduce our carbon footprint:
(These are, incidentally, each very complicated issues. I’ve sketched them out quickly here, in a very bloggy format, just to get them into the public discussion, because I notice that a lot of people are talking past each other.)
1. People in the future will be richer. Environmentalists sometimes fail to appreciate just how powerful a force economic growth is, and how much future people stand to benefit from increased growth. Climate change damage, while not exactly a geometric function, increases rather gradually, over the course of decades. Economic growth increases exponentially, annually, and so at the rates experienced in developing countries, with the right alignment of social, economic and political factors, it is possible to double per capita GDP in less than a decade. This has two consequences for climate change policy:
First, it means that we in the present can reasonably defer some of the cost of climate change mitigation/adaptation to the future, because people will have vastly more resources to confront the problem then (and, because they will be so rich, the “costs” will have less impact on their welfare). Even though climate change gets worse over time, the economic situation gets better at a much faster rate (under the most probable set of scenarios), and so it is rational to delay some action. For instance, in 1996, when the Kyoto Accord was being negotiated, the Chinese economy was only one-quarter the size that it is now. One of the arguments that the Chinese used, at the time, to exempt themselves from obligations under that treaty, was as follows: “why should we do this now, in 1996, when we are poor, when it would be so much easier to do it in 20 years, when we are four times richer?” In retrospect one can see that there was a lot to be said for this argument. But of course they can make the same argument now.
Second, it means that any policy that could negatively impact growth needs to deliver huge benefits in the future, in order to justify its opportunity cost. For example, if you plot out life expectancy in China, or infant mortality, look at the correlation with GDP, and project that out into the future, you can see the anticipated decline associated with current growth rates. Now suppose you depress that growth rate by adopting an aggressive carbon abatement program (e.g. not building any new coal-fired electricity plants). This is going to get you lower life expectancy, and a slower rate of decline in infant mortality. So you are going to be “killing” a certain number of people with this policy. On the other hand, you are going to be “saving” a bunch of other people, by mitigating climate change, and thus reducing exposure to extreme weather events, crop failure, etc. To justify the policy, the number of people you are “saving” should be at least in the ballpark of the number you are “killing.” Unfortunately, the amount of “bang for the buck” that you get out of climate change mitigation is not enormous, when compared to economic growth in underdeveloped countries. (This is, of course, not true in developed countries, where growth does not make much of a difference. But climate change is a global problem, and so you have to look at the big picture.)
2. Technological change. Underlying disagreements over climate change policy there are often differences of opinions about what the “end game” picture of the policy looks like. Some people have a view of climate change policy as being like a standard pollution problem, such as dumping mercury into waterways, where the projected ideal outcome is that you pass a law saying “you can’t do that,” and firms still have an incentive to do it, but they refrain from doing so because it is now illegal, and they are being threatened with fines, etc. This is, in my view, unrealistic, simply because of the global nature of climate change and the impossibility of an international enforcement regime. The idea that all this fossil fuel is going to just sit there, underground, untouched – this amazing source of incredibly cheap energy – and that all the nations of the world are going to cooperate to ensure that it stays that way, is to me totally unbelievable. So like many other people, I see the “end game” of policy as simply correcting a negative externality, eliminating the price distortion that it created, then relying upon the combined efforts of both governments and market actors to find a technological solution to the problem, which will eliminate the underlying incentive to burn fossil fuel.
From this perspective, the basic problem is that because fossil fuel is too cheap (due to the externality), there has been significant underinvestment in energy research. Green energy can’t compete with brown energy, because the latter is being tacitly subsidized (by the victims of climate change). If one compares the amount of technological innovation that we have seen in computing, over the course of the 20th century, and compare it to the amount of technological innovation in energy systems (which is practically zero, we still use predominantly 19th century technology), there is reason for optimism that we will be able to find zero-carbon energy sources. The world, after all, is awash with energy. At any given point in time, the earth is being struck by over 15,000 terawatts of solar energy. Total human energy usage at any given point in time is roughly 17 terawatts. Furthermore, most of that energy is not being captured directly by humans – it comes from solar energy captured and transformed millions of years ago by plants. We should be able to do better than that!
So from this perspective, the goal of carbon pricing is not actually to achieve some huge amount of carbon abatement, it is to correct the price distortion, in order to direct a much greater portion of human ingenuity to the solving of this problem.
3. Canada is not going to be doing the bulk of mitigation. The ballpark figure for the level of sustainable per capita carbon emissions is 2 carbon-tonnes per person (depending, of course, upon global population). Canada, as we know, is at about 20 right now (although our national average is brought up by the 80 or so carbon-tonnes per person being generated in Alberta and Saskatchewan). In any case, the scenario in which we actually drop to 2 per person is neither likely nor desirable. Because we’re a northern country, as well as a wealthy industrialized country, it will always be the case that it is more efficient for us to pay other people to reduce their emissions than it will be for us to reduce our own. This is not true right now. In the absence of a carbon price, there are areas in our economy where the marginal cost of abatement is zero, or even negative (e.g. lighting). So a carbon tax is intended to pick off the low-hanging fruit. But it is not intended to drive our per capita emissions down to 2. Furthermore, there is no moral requirement that we do so. The moral requirement is that we pay the full cost of the emissions that we generate. Under the ideal policy regime, lots of people in temperate climates are not going to need their full 2 tonnes (e.g. no home heating needs), while we are going to need more, so we can “buy” the space from them (which is to say, it will be better for us to exceed our nominal quota, and then compensate those affected).
4. Many other ways of helping the future. It is important not to compartmentalize the climate change issue, and to look at it in isolation from other policy questions. For instance, people sometimes talk about “climate change justice” as though it were first and foremost a distributive justice issue, of the rich world harming the poor. Climate change mitigation is then presented as an issue of justice – something that we owe to them. But because of the inertia in the climate system – the 80-year lag between actions taken now and effects experienced – any policy we could adopt is going to be pretty inefficient at addressing these justice issues. For instance, one might argue that the damage Bangladesh is going to suffer from sea-level rise is a terrible injustice, and we should adopt an aggressive carbon abatement program in order to correct this. But think what this means. Canada could spend literally billions of dollars on such a program, in order to deliver benefits to the people of Bangladesh 80 years in the future. Apart from the fact that, at current rates of growth, the average citizen of Bangladesh will be 6 times richer in 80 years than he or she is now, there is a sense in which helping people in the distant future just doesn’t seem like the best way of responding to the issues of justice that exist in the world today. Aren’t there any better ways of helping Bangladeshis? (Imagine the federal government announcing a program to improve living conditions in First Nations communities in Canada, with the first benefits being felt sometime in the early 22nd century.) It just seems like there must be better ways of helping people. What about pure redistribution, right now? Or what about making sure that people right now have clean drinking water? As soon as you look at it in context, you start to realize that there are a lot of different ways of helping people, and climate change mitigation is not obviously the most effective. What about investing in malaria eradication research?
Just to be clear, I am not taking Bjorn Lomberg’s line, arguing that we should be doing these other things instead of fighting climate change. I am simply saying that there are a lot of competing options in the policy space, and a lot of uncertainty about what the best thing to do is. There is, however, one thing that we can be certain of – that the correct price of carbon is not zero. As long as there is an atmospheric externality associated with fossil fuel consumption (and a few other things), then we should internalize it. And that means a carbon price, based on our best current estimate of the SCC. After that, though, we should let the chips fall where they may, without prejudging the question of what kind of policies towards future generations will be best.
5. Reasonable partiality for the present. Finally, there is the most controversial question, which is whether it is permissible for us to show some degree of partiality for people alive today over those who will live sometime in the future. I just wrote a long article arguing that we can and should (gated here, early MS here). The idea that we can’t is, I think, the sort of view that people are attracted to because it seems like the moral high ground, but that when you think about it, has totally crazy consequences. The big problem with giving future people equal moral standing to actual, living people, is that they vastly outnumber us. So refusing to show any partiality toward existing people (or toward people in the present) can generate all kinds of absurd scenarios, in which you wind upon constantly having to favour non-existent people over existing people (because there are so many of them!), and so as a result, no actual person ever gets any actual benefit from the policies adopted.
So part of the reason carbon taxes are low is that, when the SCC is calculated, a discount rate is applied to it – just as it is to every other major public investment or spending program – which expresses, among other things, a measure of reasonable partiality toward the present.
In summary: Why are carbon prices so low? Because the costs associated with climate change — both doing something about it and not doing something about it — are going to be spread over the next 200 years at least, and there are several reasons why we are not obliged to shoulder more than a moderate share of these burdens right away.