Yesterday, the Daily Telegraph ran an opinion piece by Zac Goldsmith, prospective Conservative candidate for Richmond-upon-Thames. Sadly, the piece represents a regression to a paternalist approach to the environment, advancing arguments that dress up a government-directed approach in terms of the free market. What follows is a running critique of Mr. Goldsmith’s article followed by recommendations for a genuinely free-market approach to the issue of climate change.
Let the free market fight climate change
We’ll come back to the title later…
In just two years, the environment debate has jumped from the margins to the mainstream. It used to be so far down the list of priorities that the pollsters rarely bothered to rate its importance.
According to Ipsos-Mori, which has been tracking the most important issues to the British public since the 1970s, 19 percent of people polled regard the environment as one of the top three issues facing Britain today. This is certainly a high level compared with recent years, but nowhere near the high water mark of 1989, when at one point 35 percent expressed the concern. For comparison, 37 percent name crime, 36 percent defence/terrorism and 22 percent education. The current high level of concern looks like a blip, like the concern over transport in 2002.
Things couldn't be more different today. Big businesses write open letters to the Prime Minister calling for stronger policies. High-street retailers battle to out-green each other.
So? That’s because they see competitive advantages to them. Big business loves to get hand-outs from Government because they come without that messy business of having to sell things that people want. They also love to see entry barriers to stop competition. These things are good for individual businesses, but bad for the economy as a whole.
The issue has mushroomed, principally because the evidence is mounting. Not all scientists agree on the gravity of the problem, but we're as close as science allows to a consensus. Nicholas Stern calculated in his report last year that there will be more than 200 million refugees by 2050 because of sea-level rise alone.
Stern “calculates” no such thing. He merely cites a twelve-year old study, which he admits has not been rigorously tested. It is also difficult to square this estimate of millions at risk from sea-level rise with the findings of the IPCC Fourth Assessment Report, which suggests we will see only 23-51 cm sea level rise by 2099 in the severe scenario that Sir Nicholas chose (second worst in the range of 6 on offer).
Even Gordon Brown feels obliged to address green issues. He mentioned climate change once each year before David Cameron took over as Conservative leader. Last year, that jumped to 16. He's made three major speeches on the environment: all since 2005.
But Brown doesn't get it. He talks about shifting the fiscal system away from taxing ''goods'', towards taxing ''bads'', but the actual level of green taxation has fallen since 1997 from 9.4 per cent to 7.7 per cent, while the tax take has soared. The Government's Sustainable Development Commission has described his use of the tax system as a ''significant failing''.
There is little to object to here.
The Chancellor's doubling of air passenger duty following the release of the Stern Review will have zero impact on the environment; it will do nothing to encourage operators to be more efficient, and can be interpreted only as yet another stealth tax. The fact that it was applied retrospectively to people who had bought tickets suggests it was not designed to discourage flying.
There is little to object to here, either, beyond the implication that we need to reduce flying. We can in fact expand flying while reducing the environmental impacts by exploring other means than the price signal, such as “free flight” approaches to air traffic control or the “green landings” that have been so successful at Stockholm airport.
Brown has failed to spot the opportunities presented by climate change. We're not going to reduce emissions without huge investment in new, clean technology. The transition to a low-carbon economy represents one of the greatest windows of all time for wealth creation.
Unfortunately, this is Bastiat’s “broken windows” fallacy – breaking a window provides employment for a glazier, but the economy actually suffers from broken windows.
Crucially, where companies have invested in low-carbon technologies and energy efficiency, they are being rewarded. Dupont has reduced its emissions by 72 per cent since 1990, saving more than $3 billion.
Good for them. Efficiency savings are good business. However, when government provides incentives for such savings beyond the incentives of good business, a search for them becomes a search for windfall profits. DuPont is a leading advocate for emissions credits for their savings, which would earn them a windfall, on their own assumptions, equivalent to a 9000 percent return on investment. That sort of rent-seeking is damaging to the economy, because those windfall profits aren’t new money, merely a transfer from customers and the taxpayer to the carbon cartel that DuPont’s favored policies would create.
There's a risk that clumsy initiatives will exhaust public appetite for green solutions. That's why the Conservative approach is so important. We are looking through a lens of opportunity that will see a shift in tax, not additional taxation. Years of stealth taxes have eroded people's trust, which is why the shifts we make in taxation will need to be transparent and honest. We also want a change in regulatory approach, away from obsessive policing of processes, towards a focus on outcomes. If the regulatory system is too prescriptive, there is no room for innovation and higher standards.
So far, all I am hearing about the ‘free market’ from Mr. Goldsmith is taxes and regulations. That’s a funny definition of ‘free market.’ This is a point worth returning to later.
Fundamentally, we need a new approach to market economics that takes into account the planet. Stern described climate change as a catastrophic market failure. The market is blind to the value of the environment; but the market is a powerful force for change, and the challenge is to price the environment into our accounting system so that pollution becomes a liability, not an externality.
How sad that Arthur Seldon is no longer with us. As he said, “Almost all economic activities…have external effects…In many instances the effort to prevent or control them may be more costly than their effects, and it may be better to tolerate some of them as unavoidable consequences of human fallibility.” This is probably the case here. Pricing the environment in the way Mr. Goldsmith suggests would incur opportunity costs. If those costs worsen the human condition, by putting people out of work, forcing industry overseas and thereby potentially increasing emissions or deluding us into thinking we’re doing something about malaria in the future when we could well nigh eradicate the disease now for a fraction of the economic cost, we have to ask whether the price is worth paying.
The debate on climate change will continue. But that shouldn't prevent action today, not least because the things we need to do to tackle climate change need doing even without climate change. According to the Building Research Establishment, basic energy efficiency measures could reduce energy use by a third, with capital costs being covered by savings within three or four years. It makes sense. So does fuel efficiency, and efforts to design waste out of our economy.
There are certainly “no regrets” options we could take, which would both reduce emissions and be economically beneficial. Yet the fuel efficiency argument is instructive. In terms of miles per gallon, the American automobile is no more efficient than it was many years ago, yet the cars are unmistakably better. What has happened is that the automobile efficiency gains have been traded, following consumer demand, for other things than gasoline usage – safety, amenities, passenger capacity to name but a few. When fuel efficiency was forced on the auto makers and customers via the CAFÉ regulations, the National Academy of Sciences found that the resulting downsizing of the fleet led to 2000 extra deaths on the road each year. That’s a big price to pay for a few more mpgs.
If we address climate change, we'll emerge with a cleaner, leaner, more efficient economy. If we don't, and the scientists are right, the economy will be the least of our worries.
On the other hand, our descendents at the end of the century will be many times richer than us. It may well be that they’ll be able to absorb the costs of global warming, if any arise, quite comfortably. Mr. Goldsmith is right that the British economy will be leaner if it follows his prescriptions – it will be shorn of the weight of manufacturing industry and the burden of having the world’s busiest international airport for a start. That may be his definition of an ‘efficient” economy, but I doubt the unemployed of Hounslow would agree with him.
Make no mistake, I regard the Conservative decision to open the environmental debate as both savvy politics and a good thing generally. What disappoints me is the way in which the advances of classical liberal thinking as it relates to the environment have been ignored in the rush to come up with a framework approach. It is almost exactly fifteen years since Terry Anderson and Don Leal published Free Market Environmentalism, which emphasized the important role of incentives, transaction costs and well-defined property rights as solutions to environmental problems. On top of that we have important insights like public choice theory and the “Baptists and bootleggers” theory of Bruce Yandle that can inform our thinking, awakening us to the realization that environmental organizations are special interests like any other. These thoughts and insights need to be applied to conservative thinking on the environment. How, for instance, can we apply the effective solutions of property rights to the atmosphere, for instance? Anderson and Leal have suggested that technologies are within reach that would allow us to deploy chemical “tags” that allow monitoring of the atmospheric effects of carbon emissions.
Indeed, Anderson himself is contemptuous of the idea that cap-and-trade, which appears to be Conservative party policy, is much better than command-and-control. He calls approaches such as Mr. Goldsmith’s Market-Like Environmentalism, or MLE. In the latest issue of PERC Reports, the magazine of his excellent environmental think-tank, based near Yellowstone Park, he writes:
"A carbon tax and tradable carbon credits pre-suppose that we know the appropriate amount of carbon to be emitted and whether achieving that level is worth the cost. Neither is the case. Unilateral reductions of carbon emissions by the United States will not reduce global temperatures. Indeed, if all countries met Kyoto targets, the commonly predicted 2'C temperature increase over the next century would be reduced by only 0.1'C.
In contrast, FME relies on markets to signal beneﬁts and costs of global warming and lets individuals respond to those signals. Higher insurance rates and cancelled policies for Florida homeowners send a price signal to coastal dwellers. Coastal land values will decrease if sea levels rise, and interior land values will increase if moisture and warmth make them more productive for agriculture. Such market signals will provide better information and accounting for beneﬁts and costs than will MLE taxes and regulations."
The Conservative Party deserves a proper debate on environmentalism and the insights that the classical liberal thinking that have served us so well for thirty years bring to it. Sadly, that debate does not seem to be happening at all. We can indeed let the market solve this problem, but not if the Conservative Party believes that it knows all the answers without exploring what the market can tell us first.