A prize for carbon-tax realism

According to a recent study, 100 corporations supposedly are responsible for 75 per cent of carbon emissions. Isn’t that great news? Just find the CEOS, lock them up and our climate problems are solved. Ain’t green social justice grand?

National Post reporter Stuart Thomson did an excellent job recently of skewering the lock-upthe-villains strategy, which relies, for example, on essentially holding Exxonmobil responsible for the fact that Americans drive gasoline-powered cars. These are corporations that produce goods and services that we ordinary, non-plutocrat folk consume and in many instances regard — quite rightly — as essential to how we live. You can turn all 100 businesses into non-profit co-operatives if you want or even nationalize them all, but so long as they keep doing what they’re doing in the way they’re accustomed to doing it, carbon output won’t change.

The same argument holds for “making the corporations pay.” As explained by new Nobel laureate, William Nordhaus of Yale, in his 2013 book The Climate Casino, basic economics says corporations generally won’t pay. You can try to take all carbon or corporate income taxes out of corporate profits and corporate profits alone, but if the rate of return in an industry falls below what’s available elsewhere, capital will go elsewhere: to another industry or another country, or both. As Nordhaus puts it, speaking about carbon taxes, “From an economic point of view … it does not make any difference whether the producer, the refiner, or the gas station pays. The carbon price will be passed on to the consumer in the form of higher prices, and the impact on the price of gasoline or other goods does not depend upon who writes the check (for the tax).”

Yale University Press celebrated Nordhaus winning the economics Nobel last week by cutting the price of his books, so I picked up a couple for $6.46 each on Kindle and spent the weekend reading them. (Just now I see they’re available for $4.83: book prices are getting more frustrating than airline tickets.) I know a lot of climate skeptics write for and probably read this page, but whatever you may think of the politics of global warming it’s fun and challenging to read a truly first-rate economist thinking through all the issues involved.

And there’s a lot in Nordhaus that skeptics can agree with:

1. Uncertainty is high. “The exact pace and extent of future Co2-induced warming are highly uncertain, particularly beyond the next few decades,” Nordhaus writes. Yes, there may be a consensus view, he notes, but “Science does not proceed by majority vote.”

2. Costs are key. “People want to be assured,” he writes, “that (carbon emissions) targets are not simply the result of overly concerned environmentalists who are intent on saving their ecosystems at the expense of humans … People want to compare costs and benefits … It will not be sufficient to say ‘Ecosystems are priceless’ or ‘We must pay any cost to save the polar bears.’ ”

3. Modelling is hard. Of his own computer exercises looking into the implications of climate tipping points, he emphasizes that the assumptions he makes “are at the outer limit of what seems plausible and have no solid basis in empirical estimates of damages” (italics added). In simulations in which, perhaps realistically, half the world doesn’t participate in carbon reduction, the optimal increase in global temperature rises substantially. How come? “Because abatement has become so expensive, it is economically beneficial to abate relatively little and live with the damages.” This reflects the principle that “the best target will depend upon the costs of achieving it.”

When it comes to solutions, Nordhaus is equally eyes-open. China and India have to be included, although the very poorest countries, which account for only 10 per cent of emissions, might be exempted. And free-riding is a constant problem. The best combination for any individual country is global action combined with local inaction, which he points out was the path Canada took following Kyoto. As he says, “Countries have strong incentives to proclaim lofty and ambitious goals — and then to ignore these goals and go about business as usual.”

Climate change is the “Goliath of externalities,” Nordhaus argues. The fear many of us have is that fighting Goliath will unshackle the Leviathan of large government. In this regard, Nordhaus argues that pricing carbon, despite the unknowns involved, is much better than regulation, “which would involve literally thousands of technologies and millions of decisions.” OK, but how do we prevent a big new revenue stream like carbon taxes from leading to big new government departments regulating many other aspects of our lives?

Though Nordhaus devotes a couple of chapters to the politics of carbon pricing, they don’t satisfactorily answer that question. The problem, which is just as hard as climate change but a lot older, is figuring out how to bind governments to modest ambitions and revenue neutrality. The big brain that figures that one out will deserve a Nobel of its own, at least one.