Markets, politics and tackling climate change

The government is committing to  Net Zero” greenhouse gas (GHG) emissions by 2050. This is good news but the means of achieving it are critical. Global reduction is not being achieved but it would be wrong to suggest that nothing has been done and certainly panicking would not be a rational response. Global CO2 emissions per unit of GDP have been decreasing at annual rate of about 1.8 percent for the last 80 years but economic growth means that global emissions have still been increasing at 2.6 percent per year. 

The figures above are taken from “The Climate Casino” by William Nordhouse, the recipient of the 2018 Nobel Prize for Economics. Nordhaus presents a scientifically informed overview of the climate dilemma and the solutions to it. The efficient solution is carbon pricing. This is not a view restricted to a some academics but is the consensus of main stream economists, as Tim Harford has pointed out. Carbon pricing can take two forms, as a tax or through setting emission targets and providing tradable permits to cap the GHG emissions. According to the analysis presented by Nordhaus “Carbon Tax” is the more efficient mechanism but “Cap and Trade” is a good approach if implemented effectively. Cap and Trade is also easier to sell politically. For example the EU has implemented such a scheme but  it has not priced GHG emissions at a high enough level to drive the changes required. 

Importantly a carbon tax corrects the market failure that has allowed pollution to continue because the polluter does not pay for the consequences. The effect is not merely punitive but more significantly it allows the market mechanism to function as the principal driver of climate change mitigation as well as providing revenue to compensate hardship and to fund needed technology.  It makes renewable energy sources more competitive without the need to introduce piece-meal subsidies or other ad hoc or even authoritarian government interventions. The other important contribution of the competitive market mechanism is innovation. This is important for efficiency and essential technological breakthrough, such as carbon capture and storage.

At about three quarters of the way through his book Nordhouse comments that the economic solution is in place. The problems that remain are political, coming from two directions.  First is the reluctance of the population to accept that the pain involved is necessary now. The second is the strong temptation for a nation to “free load” on the efforts of other countries, as the solution needs to be global. 

In our leadership contest both candidates are credible champions for tackling climate change. Jo Swinson has the idea  to compel companies to report on their climate risks and Ed Davey proposes to decarbonise capitalism. This indicates that they are looking for radical solutions to achieve the “Net Zero” economy. The solution with the best chance of delivering is carbon pricing that will release market-based innovation and competition. The political challenges for the future leader, party and country will be convincing the population and achieving global cooperation.   

* Dr Robert Johnston is a Liberal Reform Board Member, member of the Association of Liberal Democrat Engineers and Scientists and Fellow of the Institute of Physics.

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9 Comments

  • William Fowler 14th Jun '19 - 1:56pm

    If you want people to become low energy users, start by getting rid of the standing charges from energy companies, at the moment if you use small amounts of energy you still have to pay for the standing charge (in fact, govn policies have forced ebico to charge absurd rates if you want to avoid standing charges whereas previously they were reasonable). Once the energy companies have got over that shock, I would then suggest that the govn would step in and determine the rate for the first £20 of energy per month, allowing the companies to then set their own rates in competeition for higher usage, although they would only be allowed a single rate so that consumers can easily compare them.

    By starkly showing the cost difference between low energy use and higher energy use, the consumer will be gently pushed in the right direction.

    Also, there is a huge industry behind making solar power generation a complex business for the consumer and this needs to be simplified by the simple expedient of having smart meters running backwards when excess energy is generated, directly crediting the consumer for use at other times (technically possible as it already happens in some USA states and Canada).

    These kind of policies will go down well with the electorate rather than vague musings on green energy.

  • John Marriott 14th Jun '19 - 5:35pm

    You know, I reckon that I can buy into the need to do something to combat global warming and to save our environment. The problem I’ve got is that GB plc alone isn’t going to do it. However, if we are going to do our bit, we have got to be realistic about what is achievable and by what date. It won’t be easy and, as a 75 year old, it isn’t going to be up to people like me if we are to stick to the original time frame. Those advocating change today rather than tomorrow should be challenged. What they want might be possible in a totalitarian society; but not in ours. We need less zealots and more pragmatists.

  • @ William Fowler

    This is the single most sensible comment I think I have ever read on the subject of energy bills / charges / generation.

    As Ebico customers we really took a hit when the government inspired idea of scrapping standing charges was forced on everyone – we are very low users – and as such, standing charges of all kinds are usually the greater part of our bill. We’re still with Ebico – it’s less bad than the other options, but considering how low our uses are, we now pay well over the odds.

    And then you’ve got the way that companies give lower rates to higher users. That stinks, and is thoroughly anti-environmental to boot – the polluter pays less!

    Water is another gripe for us.

    The companies claim that standing charges are fair, as everyone then contributes to the maintenance of the system. This is a nonsense. Can you just imagine it if you went to the the supermarket, bought 5 tins of beans and were told that the cost was £1.25 for the beans, and £1.50 for stress to the shelves? and someone bought 500 tins of beans – with a reduced price for a bulk buy – yet also payed the same £1.50 charge for shelf stress? Yet this is what we put up with all the time.

    Hope this makes sense, I’m well away on last years plum wine – only a gallon to go!

  • Frankly, we have to look beyond “market mechanisms” to break into this crisis. When / if we establish a “new paradigm”, the market may be able to work in a beneficial way, but I don’t think the “paradigm shift” we need at this stage can be achieved by it. We need a way of diverting resources (skills, labour, materials etc as well as simply money) to the overall “save the planet” fight. Those who say it is like fighting a war, only more long term. The main driver is psychological and social, not economic. Which is where politicians, and their alliances with people, come in….

  • “Climate change” is only a part of the changes that are threats to humanity. There is also the well publicised threat from pollution. Micro plastics are just part of this. There are the elimination of most species on our planet. And of course we have little idea of the long term effects of the huge changes in the ecosystems that all this is associated with.
    Underlying it all is the fact that as a species we have control over our planet, But we have no means of taking responsibility for this.
    In our own country we see that our ideas of democracy have not progressed in any real way since the late nineteenth or early twentieth century. The changes we are causing on our planet are ever more rapid. The changes we are making in the organisation of ourselves are small if any .

  • Neil Sandison 15th Jun '19 - 12:21pm

    The temptation is always to reach for a tax ,levy or fine to encourage climate change policy but as we have seen on many occasions governments both national and local can be very slow in adjusting the way they tackle such problems because they lock themselves in overly long contracts lack flexability , and think the bigger the project the more likely it is to be successful rather than look at modular projects that are more adaptable and on much shorter contracts .What we need to offer industry is the challenge to adapt ,the incentive through tax credits to innovate .Why are we still land filling creating green house gases when waste can be turned to fuel to power industry ?ask Suez and Cemex .Why are we fracking for gas when water companies could be turning sewage into gas by anearobic digestion ? We need to get industry onside and demonstrate being green and supporting the circular economy is good for business sometimes the carrot is better than the stick.

  • Steve Trevethan 15th Jun '19 - 3:58pm

    Perhaps parts of the problem, and so parts of the solution, are Globalisation and accountancy rules?
    What are the environmental costs of importing Cox apples from New Zealand when they grow well in the UK and France?
    Why are damages to our ecosystems etc. classified as “externalities” and not counted in costings?

  • My thoughts exactly, Steve Trevethan.

    In particular, accountancy rules reflect too much fragmentation, too little integration of systems. To an extent, you can understand individuals and businesses wanting to export as many costs as possible and to maximise profits within their own “box” (although in our current world situation selfishness is not a particular virtue!!) However, when it comes to mutual and public and voluntary bodies etc, these rules become a positive nightmare!

  • Peter Hirst 17th Jun '19 - 1:39pm

    I like the idea of carbon rationing though it would need to be adopted by a body such as The United Nations to work properly. The concept of lowering the total and allowing market forces determine who uses it by purchasing others’ quotas at a set or negotiated price would help to demonstrate the sort of action that is necessary in an emergency. The issue is dealing with those companies or countries that refuse to join in. An escalating price for individual businesses is another option as long as it was steep enough to alter behaviour.

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