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Thursday, March 15, 2007

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.

    Posted by on Thursday, March 15, 2007 at 02:10 PM in Economics, Environment, Regulation | Permalink  TrackBack (0)  Comments (9)


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