If the best method for tackling climate change is not on offer, try something else
ECONOMISTS LIKE TO argue, about climate change as much as anything else. Some of the fiercest rows are over the discount rate—how to weigh the likelihood that future generations will be richer than the current one when deciding how much to spend on averting climate change today—and over how to price catastrophic but unlikely events such as the collapse of the Greenland ice sheet. But on the biggest issue of all they nod in agreement, whatever their political persuasion. The best way to tackle climate change, they insist, is through a global carbon tax.
Politicians tend to assume that subsidising clean energy has the same effect as taxing carbon, says Ottmar Edenhofer, an economist at the Potsdam Institute for Climate Impact Research. It does not. Subsidies for wind, solar and nuclear power increase the supply of wind, solar and nuclear energy, but they do not squeeze the polluters. Indeed, as has been shown earlier in this report, green-power subsidies can actually boost the most polluting fossil fuels. A carbon tax would bear down on the thing that most needs to be suppressed.
Carbon taxes have their problems, though, beginning with the word “tax”. New levies are never popular. Even if governments promised to cut other taxes, so that a carbon tax would be fiscally neutral, they would make enemies. It is a sound rule of politics that the winners from any reform are less delighted than the losers are angry. And no government could guarantee that carbon-dioxide emissions would fall by a specific amount. A carbon tax represents certain pain for uncertain gain.
Instead, many countries have adopted “cap-and-trade” schemes. These specify the quantity of carbon that can be emitted and hand out, or auction, permits to pollute up to that limit. Polluters can buy and sell permits, which in theory means that the cheapest methods of reducing emissions are deployed first. By far the biggest cap-and-trade scheme was launched in 2005 by the European Union. It covers not only carbon dioxide but also nitrous oxide and perfluorocarbons, and includes emissions from commercial aircraft. California also has a cap-and-trade scheme, which is linked to projects run by some Canadian provinces. Earlier this year South Korea set one up. China, which already has six regional schemes of this sort, has promised a national one.
Capping and trading pollution is less good than taxing it. Under pressure from heavy industry, governments tend to hand out too many pollution credits, so the price is invariably too low to alter behaviour. As this report went to press, carbon was trading in Europe for less than €10 a tonne. And cap-and-trade schemes can encourage free-riding. If a country covered by an international emissions-trading scheme decides to enforce stricter regulations, the market will be flooded with cheap pollution credits, encouraging others to pollute more. It helps to set a minimum carbon price and keep raising it, as California is doing.
The big problem afflicting carbon taxes and cap-and-trade schemes alike is that not everybody wants to join the club. Carbon is best priced globally, partly because popular support will ebb if jobs move from virtuous countries to less virtuous ones, and partly because such schemes work much better on a large scale. William Nordhaus, a climate economist at Yale University, calculates that if every country in the world were to tax carbon, temperatures could be held to 2°C above pre-industrial levels at a cost of 1-2% of world income per year. If the scheme were confined to countries representing only half of global emissions, the two-degree target would be almost impossible to hit.
The obvious way to get countries to join a climate club is by threatening their exporters. Taxing imports at the border according to their carbon content, but giving credits for any carbon taxes already paid at home, might encourage exporting countries to levy their own taxes. But this would be brutally difficult to implement. Besides, border taxes on carbon would suppress trade, just as other tariffs do. And they might well prove illegal.
Count to three
A global carbon tax—or even one involving many countries—is likely to remain an economic theory for a long time. Certainly, nothing of the sort will be seriously discussed in Paris. Even so, there are three perfectly good things everybody could be getting on with right away. Two are humdrum, though no less worthwhile for that. The third requires greater ambition.
First, countries should be nudged to upgrade their promises for cutting emissions. In advance of the Paris conference, an untidy mess of pledges has been dumped on the table. Some countries say, fairly straightforwardly, that they will cut greenhouse-gas emissions by such-and-such a percentage compared with a particular year. But they pick different base years—invariably ones in which their emissions were very high—to make their promises look better. Australia goes for 2005; Russia plumps for 1990, just before its heavy industries collapsed. Other countries do not even propose to hold emissions to a specific level. Some countries go in for statistical tricks, arguing, for example, that their efforts to prevent deforestation should be weighed more generously. The pledges should be made more comparable.
A good second move would be to ditch the carbon monomania. Tackling carbon dioxide, the most important greenhouse gas, is essential. Yet aside from its effect on ocean chemistry and the fact that it is warming the world, though so gradually that most people cannot detect it, carbon dioxide is innocuous. And the effects of emissions persist in the atmosphere for so long that even a drastic cut would have only a slight effect on climate change in the short term.
Carbon dioxide is not, however, the only greenhouse pollutant. Methane, black carbon (ie, soot) and hydrofluorocarbons also warm the world a good deal. It has been estimated that if strong action were taken to suppress them, the world might be 0.6°C cooler by 2050 than it would otherwise be—a quick, fairly noticeable change. There is talk of regulating hydrofluorocarbons under the Montreal Protocol, which cracks down on ozone-depleting chlorofluorocarbons—an excellent idea.
The best target is black carbon, which comes off open wood fires and out of the exhaust pipes of unsophisticated diesel vehicles. This is an immediate killer, and it is easier to tackle than carbon dioxide. California cut black-carbon emissions by half in 20 years, mostly by cracking down on vehicles. More research on cheap, clean stoves for poor countries would be money well spent.
The most important thing of all is to innovate. Bill Gates, the philanthropist, laments that in all the discussions about climate change around the UN, almost nothing is said about research. Yet there is a crying need to develop technologies that are cheaper and more dependable than today’s wind turbines and solar farms. Mr Gates has invested in new types of nuclear reactor—but he also holds out hope for artificial photosynthesis, which uses solar energy to make hydrogen from water. “It’s not like the Manhattan Project,” he says. “There are maybe a hundred different paths.”
Mr Gates points out that annual spending on energy research in America is only about $6 billion, compared with $30 billion on medical research—and America is much more open-handed than many other countries. Energy firms do not spend a lot on research because there is no product differentiation in energy (electrons are electrons) and thus nothing exciting to sell until the price falls below that of the existing technology. So taxpayers will have to stump up most of the cash.
If more money were forthcoming, a good deal of it would be wasted on dead-end projects. But that is the nature of research and development. Only a few successes would be needed in order to avert calamitous climate change. And the funds that governments are currently pouring into subsidies for things like offshore wind farms are not doing much good. “We’re spending almost all our money on wind turbines and solar panels that we know are not effective,” says Bjorn Lomborg of the Copenhagen Consensus Centre. But then, he points out, people are used to doing things that make them feel good about climate change, rather than things that actually do good.