This post comes from my Cambridge Econometrics colleague and co-director Hector Pollitt, who is head of the modelling team there. I share many of his concerns:
The European Association of Environmental and Resource Economists (EAERE) is the largest group of environment-minded economists in Europe. It has recently put out a statement on carbon pricing.
Although many people who I respect have given their support to the statement, it is not something I can do because it is a clear example of the misuse of neoclassical economics.
In short, the EAERE statement says that:
- Carbon pricing is the most cost-effective way to reduce emissions.
- A carbon price should be implemented and increased until the Paris targets are met.
- The EU ETS should be tightened, more allowances auctioned and border tax adjustments considered.
- A carbon tax should be applied to other sectors.
- Revenues from the carbon tax should be used to offset social impacts and encourage innovation.
For the record, I more or less agree with points 3-5, but points 1-2 are nothing more than neoclassical fantasy.
To reach the conclusion that carbon pricing is the most cost-effective way of reducing emissions, you must assume that markets work freely with no monopoly power, companies and households have perfect knowledge about the products available to them now and in the future and everyone always behaves fully rationally.
All these assumptions can easily be disproven.
Fantasy and reality
Unfortunately, engaging in neoclassical fantasy is what many economists do best and those at the EAERE are no exception. Let's consider something more realistic.
Much of our current hopes for decarbonisation rest on solar power. The cost of solar power has fallen by more than 80% in the last ten years. Why? Because policies implemented in Germany led to an industry developing and eventually taking off in China. This was not caused by a carbon price, but by a mandate for renewable electricity generation.
If a carbon price had been levied, it would have caused a shift from coal to gas-fired plants and the solar revolution may not have happened.
We would not now have a low-cost way to reduce emissions — instead we'd be stuck paying a carbon price on gas and face the prospect of stranded gas assets as the carbon price increased.
This point brings us to an apparent inconsistency in the EAERE's statement. Sensibly, point 5 suggests that carbon price revenues should be used to boost innovation. But if the carbon price is already the most cost-effective way of reducing emissions, how is more innovation going to help?
A better plan for action
To the follow-on question; what should we do instead? Well, implement carbon pricing for sure. Much better to work with the market than against it. And, absolutely, use the revenues to improve social conditions (and, yes, encourage innovation).
But we must be clear. A carbon price alone will not be sufficient to decarbonise fast enough (except in a neoclassical macroeconomic CGE model which, conveniently, ignores time).
Other policies are needed too. The EAERE disparagingly calls these other policies ‘less efficient' but, again, only if you accept the restrictive neoclassical assumptions. For example, many of the lowest-cost options to reduce emissions are through energy efficiency measures that are not taken up because people don't know about them. Targeted regulation could take advantage of this easily. A carbon price could not.
Modelling at Cambridge Econometrics shows that a rapid transition requires a combination of (1) carbon pricing, (2) regulation and (3) support for new technologies.
The logic is fairly simple: technologies need to be developed, then they need to be competitive in the market, with the introduction of regulation where the market doesn't work.
By overemphasising the role of carbon pricing through a misunderstanding of how the economy really works, the EAERE puts at risk long-term decarbonisation.
Evidence shows that regulation and support for innovative solutions are both required to meet carbon targets and therefore a statement which overlooks the importance of these policy areas and instead focuses on restrictive neoclassical assumptions is not one that I could support.
This was a missed opportunity for the economic community to give policy makers constructive advice, based on real-world assumptions, to tackle the now urgent task of decarbonising the world economy.
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We need to ensure more realistic fossil fuel prices that include the cost to the environment, and that are high enough to tackle climate change by creating economic incentives to drive efficiency and bring alternative fuels to market. This will provide funding for other green programmes and safety nets to those vulnerable to higher prices via rapidly rising carbon taxes and revenue from carbon trading.
We need the alternatives before the pricing
Otherwise we will get a quite reasonable backlash
I was quoting from the Green New Deal report of 2008.
So? You think opinion does not move on?
How else does progress happen?
Some people have no belief that when the facts change so should opinion. And we do, very obviously, know more now than we did.
And so we end up with an act of wilful self destruction. The vast majority can see that in itself it is glaringly obviously not the right thing to do. But none of our leaders can apparently work out how they can stop an act of self-destruction that they created. In that sense they are the politicians that we may deserve right now, even if they are not the politicians that we need.
I admire your efforts to find ways of reducing carbon emissions within the current framework of BAU,
I get it that modern society doesn’t want to give up the comforts, conveniences and trappings of post 20th century fossil fuel powered modernity,
I do question whether net zero carbon emissions are achievable without making sacrifices of comfort and convenience,
transition away from fossil fuels has to happen, it will be forced eventually by the finite availability of fossil fuels, lifestyles will change, partly by choice but also, eventually, due the pressures of resource constraints,
it’s an indisputable reality, but unfortunately it just isn’t happening fast enough to make the slightest difference to the rate of climate change,
I’m not saying we need a plan: B, there is no plan: B, we have to change, but if change, for a myriad of complex reasons, is going to be so excrutiatingly slow we really need a mitigation plan to buy us more time to change,
the only real and viable plan to buy time and try and dampen the severity of climate change is to launch a vast tree planting project globally,
https://www.theguardian.com/environment/2019/jul/04/planting-billions-trees-best-tackle-climate-crisis-scientists-canopy-emissions
putting some sort of charge, levy or tax on carbon emission won’t have much of an impact in itself but if the money raised was ploughed into planting trees and then ensuring their survival to maturity we might actually see CO2 levels stop rising or even start to drop,
it’s a no brainer that we should be planting a shitload of trees constantly for the forseeable future, it seems entirely logical that the cost of this should be placed upon the various fossil fuel industries and the consumers of their products,
we need to start this before things get so bad that even planting trees becomes impossible.
We need to give things up AND plant trees in my opinion
agreed,
I’ve already given up as much as I can think of, but it was my free choice, I can’t make that choice for others in all fairness,
all I want to do now is something practical and positive, I’m happy to devote the rest of my natural life to planting and tending trees,
all I ask is the legal right of stewardship of a reasonable sized plot of land, it doesn’t have to be in the uk, it doesn’t have to be particularily favourable to growing stuff either,
and I just need a modest subsistence income to free me up to get on with doing it,
I dare say there are a few others out there who’d take the same deal,
so… anyone want to fix up a framework for a Green Pioneer Corps?
[…] Cross-posted from Tax Research UK […]
To me, turning emissions into a tradeable commodity or pricing it as a charging system is just fiddling whilst Rome burns.
When I moved from Nottingham to York in the early 1990’s I was struck at how easy it was to recycle things locally in York – nearly every neighbourhood had a recycling point at a car park for paper, tin cans and glass.
All I’m saying is that in order to reduce carbon, people need to be provided with the means to reduce it.
Put it out there and they will use the alternatives.
The 5 points in EARE’s statement you have highlighted could not present more clearly the total and utter poverty and irrelevance of the prescriptions of neoclassical economics not only in terms of climate change, but also in relation to public infrastructure and R&D investment generally and the role of government to support the provision of health, education and social welfare services vital to the maintenance of a civilised existence.
They start with an alleged “positive” statement about the virtues of carbon taxes and end with a hopeful “normative” statement about what should be done with the increased tax revenues. Why on earth should higher costs be imposed on the general population, many of whom are not capable of responding to them effectively without damaging their well-being (and will be opposed vociferously by those capable of bearing the increased costs) when all historical evidence shows that the increased revenue will not be used in any meaningful way to mitigate the impacts on those least able to bear the increased cost burden?
The principal solution is increased, targeted, effectively monitored expenditure at the national, regional and local/municipal level. However, among the current 28 EU members only Sweden and Estonia are not subjective to the Corrective Arm of the Excessive Deficit Procedure because they are in breach of either the 3% government budget deficit limit or the 60% debt/GDP bound (or both) of the EU’s Growth and Stability Pact – aka the Gloom and Stagnation Pact. There is a wall of money in the form of a global savings glut looking for safe assets. Investors seeking these are paying to invest in some government bonds. Yet governments are either unwilling to provide them or prevented from providing doing so.
And this is the conventional wisdom that benefits the wealthy and powerful and is spouted and supported by armies of professional functionaries and flunkies in their pay and by the politicians they have suborned.
Time for change.
Cutting the speed limit to 50mph on A roads and 60mph on motorways would reduce road traffic emissions substantially and could be done almost immediately. It would make little difference to real world joirney times.
It would also be easy to ban high emissions vehicles from towns and cities during peak periods. The limit could be set at 100 units of CO2 initially and progressively reduced.
I rarely see these simple measures being discussed…
I agree
Richard I think your comments apply to this group as well …https://www.theglobeandmail.com/business/commentary/article-a-carbon-tax-should-replace-other-less-efficient-policies
https://en.m.wikipedia.org/wiki/Montreal_Economic_Institute
Indeed
France has shown us how the emission reducing infrastructure needs of the civilian population must be provided prior to any jacking of the carbon prices. Otherwise carnage will ensue.
I would have thought point 5 nulifies any credibility of the statement as it continues the myth that taxes must first be raised prior to investment in R&D that might save life on Earth as we know it.