Climate Change Policy Needs a KISS (Updated)

With global warming all but established as fact, Martin Wolf is moving on to the next question, how to construct optimal policies to stem the rise in greenhouse gases:

Why emissions curbs must be simple, by Martin Wolf, Commentary, Financial Times: Man-made climate change may prove a disaster. No, I do not mean climate change itself. My concern here is rather over the policy responses. For ... recognition of the risks is generating a host of interventionist gimmickry, not least in the UK.

People I think of as my friends – pro-market liberals – are suspicious of what many of them consider the “man-made climate change hysteria”. They are surely right to note that it is a remarkably convenient banner for opponents of the market economy... This time, they fear, Malthusians and socialists may have a politically successful ... argument in favour of a long-standing desire to throttle the life out of the free-enterprise economy. ...

Yet even if one accepts the validity of concerns about man-made climate change, one should agree that market liberals also have a legitimate concern. Instead of policies that are minimally intrusive, well-targeted and efficient, we are depressingly likely to get the exact opposite. ...

Since climate change is likely to be a concern over decades, it is essential to get policy right. The big rule, as always, is: keep it simple, stupid.

A good example of what many (though not all) economists would consider a mistake has been the decision to go for tradeable emissions permits whose prices have proved disturbingly unstable. Predictably, the adoption of such permits is already leading to proposals to create a carbon emissions budget for every individual ... ([e.g. see] Mark Roodhouse). ... It is clear why an egalitarian with control-freak tendencies might welcome such a system of bureaucratic controls on most of humanity... But why should anybody else do so? And why should anybody believe it could be made workable?

Yet Mr Roodhouse is at least logical. He does also accept that his ration coupons should be tradeable. Meanwhile, Mr Cameron suggests that each individual might have some sort of “green air miles allowance”, with a sliding scale of taxation on those who travel most. The difficulty of monitoring such travel would prove immense: one can already foresee the host of business people taking their flights from Paris. ...[T]his is surely no more than a populist gimmick.

Then there is the government. In its new climate change bill, it proposes “a series of clear targets for reducing carbon dioxide emissions – including making the UK’s targets for a 60 per cent reduction by 2050 and a 26 to 32 per cent reduction by 2020 legally binding”. In this case, as I understand it, the government would be held legally liable for failing to compel the people of this country to behave as it desires over the next half century. I find that frightening.

Meanwhile, ... the chancellor proposed a raft of initiatives and incentives on light bulbs, efficiency standards, home insulation and micro-generation. It is impossible for the outsider to judge whether these would be cost-effective. Is the plan to make new homes “zero carbon” an efficient way to achieve emissions reductions? I have no idea. I suspect the government does not have any idea either.

Let us concentrate on the big issues: any workable policy system must be global; it must create stable incentives; it must be administratively simple; it must include investment in creation and dissemination of new technologies; and, not least, it must allow people to get on with their lives with as much freedom as possible. Uniform prices on emissions – ideally, through taxation – will do most of this job. Almost everything else is unnecessary or counterproductive.

Rob Metcalfe at Natural Capital is also unimpressed with the UK's proposal to create carbon targets, saying the targets for reducing carbon dioxide emissions, upon closer inspection are "not really binding at all."

I'll just repeat that, "it is essential to get policy right. The big rule, as always, is: keep it simple, stupid."

Update: Let me see if I can relate this to what Robert Frank is saying in the earlier post from today.

Economists prefer the most efficient taxes, the ones with the least distortions to the economy. The idea, in essence, is that we can use redistribution policy ex-post to make everyone better off or to address problems of equity. The more stuff you have to do that with - i.e. the more efficient the tax policy is - the better. Thus, first try to ensure that, after the policy and associated distortions are in place, there is as much GDP available as possible, then redistribute the gains in some optimal way.

Robert Frank's point is that the best policy may be blocked by politics, particularly the politics associated with redistributive policy (e.g., give someone 10 through a policy change, then take away 4 through taxes to make sure everyone gains, and there will be protests from the person who has 10 - they will argue hard for the policy, but oppose the subsequent redistribution). Because of that, we end up with suboptimal, convoluted policies that try to (a) please special interest groups so that it can pass the political hurdle, and (b) address equity and distributional issues up front in the policy itself rather than ex-post through redistributive policy.

Politics can be left out of our theoretical models, but it has to be considered when policies are actually put into place. Because holding out for the perfect policy according to idealized theoretical structures is an effective way to do your opponents a favor and block policy altogether, my view (perhaps without enough thought) is that we should use the simplest, most efficient policy that is also politically possible so long as the net benefits, including desired redistributions, are clear.

Comments

[evagrius]

Can someone answer why it's necessary for a "free market" to be based on unchecked comsumption and waste of natural resources?

Global warming, ( that portion caused by human activity), is not the result of "the free market", it's the result of unthinking consumption and waste.

I don't see being wasteful as a necessary condition for a free market.

How the two, ( waste and the free market), became conjoined twins has me puzzled.

[RoySV]

Ok. Let me translate what Martin Wolf said.

We free market people are very smart. It is right to fear the people that we smart ones like to label as (choose your ideological buttons)

The government doesn't know what it's doing. But we smart people do. However we're not going to solve anything because that would dirty our hands. But we are available to criticize and belittle any other proposal that is not smart like us and that may come from bad people.

By the way, The "free market" is a wonderful munificent principle of God and must never be sullied in anyway by stupid people who are not like us. Oh, and the policies and power positions of we smart people has nothing to do with the current problems in the World. Especially nothing to do with resource constraints. If you say otherwise you are clearly not smart.

Have I missed anything?

[Bruce Wilder]

The wilfully complacent, and Wolf can stand as an example, require those, who are paying attention to scream at 200 decibels, before they will listen, and then complain that the message is too loud.

Then, they want whatever remedies are proposed to be "minimally intrusive", and then complain when what is proposed is devoid of burdensome taxes and so "non-intrusive" as to be non-binding.

Evolving the political and economic concepts, as well as the technology, to enable humans to manage the climate along with the disposal of all the trash and pollution 10 billion people can generate, is not going to be easy or non-intrusive.

This "don't bother me" attitude is not going to cut it. And, let's not pretend that by waving a hand at Pigou, you've fully addressed the economics, let alone the politics.

If Wolf is going to get up in arms, defending market capitalism from the ghost of Malthus and unnamed "socialists", over a campaign to get people to replace their lightbulbs, he needs to get out of the office more.

I'm with Evagirus on this one: on the face of it, fossil-fuel-based, high-consumption, high-waste "free" market capitalism is not only a civilizational strategy marked for failure, it may well prove to be equivalent to mass-suicide. Martin Wolf needs to put down the Kool-Aid and advise his well-heeled readers to do the same.

[ken melvin]

Gotta hand it to the guy; I would never have thought it so important to save free-enterprise and the market economy by my lonesome.

[James Killus]

Carbon taxes are pretty simple. Subsidies (and a removal of artificial regulatory barriers) to wind, wave, and solar power are pretty simple. Taxes on fossil fuel company profits are very simple.

Defining corporate disinformation campaigns as commercial speech (and thereby subject to regulation as fraud) would be simple, as would deciding that corporate expenditures are not the same thing as "free speech."

On the other hand, politics is complicated. So what Wolfe is actually demanding is a non-political solution to an inherently political problem. Good luck with that.

"It is difficult to get a man to understand something when his salary depends upon his not understanding it." - Upton Sinclair

[Bupa]

Martin Wolf has spent several months coming out of his shell and recognizing that climate change is a problem the world needs to address. He has supported a carbon tax. He has defended Nick Stern’s discount rate. He is not complacent. He continues to grapple with this important issue. But he doesn't know what to do. He admits he has no idea how to address climate change. Here he is right to call on policy makers to “concentrate on the big issues.” But I would suggest that rather than taking pot shots at the UK initiative, his efforts would be better placed at prodding the delinquent Americans to recognize the urgency of the matter and show some initiative.

Let’s not snicker too much at “smart people”. This might be the gravest danger our species has ever faced. Ideally we would find a way to devote our best minds to finding solutions. We need a Manhattan Project on Climate Change.

Martin Wolf isn’t one of our best minds, but he is fairly influential. There is certainly a role for Martin Wolf-types to rally support.

What would make a Manhattan Project on Climate Change more likely would be an American President with Al Gore’s conviction.

This seems unlikely. The political challenges are overwhelming. The power of inertia is overwhelming. This is a global issue and the divergence of interest groups globally is enormous.

Mark says: “Politics can be left out of our theoretical models, but it has to be considered when policies are actually put into place. Because holding out for the perfect policy according to idealized theoretical structures is an effective way to do your opponents a favor and block policy altogether…we should use the simplest, most efficient policy that is also politically possible so long as the net benefits, including desired redistributions, are clear.”

Yeah, but Mark, we need to find policies that will work. Doing something is usually preferable to doing nothing, but we gotta get the concentration of greenhouse gases in the atmosphere to stabilize. That’s a pretty tall order.

Also, don’t forget, in addition to a set of “prevention” policies we need another set of policies (adaptation policies) to help us adapt to the bits of climate change that are inevitable. Even if we miraculously stopped producing greenhouse gases today the globe will continue to warm for another 100 years. Since even under the most wildly optimistic scenario we are at least a generation from being able to stabilize the concentration of greenhouse gases in the atmosphere we also must adopt policies which will help us adapt to the climate change that we can’t prevent. Perversely, most of the places likely to suffer most from climate change are populated with the poorest people in the world. Adapting to climate change that we can’t prevent requires another set of policies that will be a pretty tall order.

Martin Wolf says “any workable policy system must be global; it must create stable incentives; it must be administratively simple; it must include investment in creation and dissemination of new technologies; and, not least, it must allow people to get on with their lives with as much freedom as possible. Uniform prices on emissions – ideally, through taxation – will do most of this job. Almost everything else is unnecessary or counterproductive.”

A carbon tax is his only answer. No effort is made to demonstrate that this will solve our problems by itself. He knows it won't. Yet his libertarian world view finds regulating housing construction and light bulb use offensive. A carbon tax, "almost everything else is unnecessary or counterproductive." Bullocks. How lame. The tortoise is sticking his head back in the shell.

[reason]

Mark,
I would love it if you could find some serious papers on urban housing regulation. I have a feeling that good housing regulation can be a clear welfare gain, with only land speculators loosing. The reason is that land prices rise to what people can afford to pay, so better regulations doesn't increase the price of new houses to new buyers, it just improves the quality of houses. This could also be argued from the point of view of buyers myopia - buyers of new houses do not consider the energy requirements 20 years from now, but because the lifetime of the house is so long, they should.

[Meh]

The scary thing is the way that Wolf and others have slipped out of responsibility for the "carbon trading market" policy when it is precisely the "markets can solve anything" supporters like Wolf who campaigned against carbon taxes and alternative energy subsidies in favour of an emissions trading market.

It's the lying that's so depressing.

[Max Anacker]

How foolish can we be?

To seriously believe all the hype that man is causing a climate disaster that will destroy the planet is not only basically stupid, it is extremely arrogant.

We insignificant humans do not have the power to destroy this planet. Never did.

We also do not have the ability to change the current climate trends, or even to accurately forecast what is going to happen over the next 10 let alone 100 years.

Let’s hope things will get warmer, rather than colder. We don’t need another ice age.

Forget all the junk science by so-called experts that are all in on the multi-billion dollar “climate research scam”.

Forget all the disaster reports being sold by environmental activists via the sensationalist media.

Forget all the self-righteous calls for action by power-hungry politicians.

Use your common sense. It’s all a hoax.