The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [34]
Economists are therefore strong advocates of establishing a carbon market which, if it set up effectively, will deliver a long-term market price for carbon. William Nordhaus writes: “Carbon prices must be raised to transmit the social costs of GHG emissions to the everyday decisions of billions of firms and people.”17 Existing carbon markets are flawed. The price of carbon they set has turned out to be volatile and too low, mainly because governments have given in to industry protests in setting up the market, making too many exceptions for too large an amount of emissions for the market to work well. But a carbon price will need to be sufficiently high and stable to incentivize investment in low-carbon forms of energy and in energy saving.
Governments can increase the carbon price by themselves if necessary by charging a carbon tax—indeed some have already introduced carbon taxes albeit again in a half-hearted way due to effective lobbying by certain industry groups.18 Ross McKitrick suggests tying the rate of the carbon tax to global temperature, so that the more serious the problem becomes, the greater the incentive that will be created to reduce energy consumption.19 Indeed there is a substantial economic literature on the use of taxes and the creation of markets for carbon, all aimed at increasing the price consumers and businesses must pay to use energy and carbon-intensive products, and thus changing their behavior. Price is a powerful incentive, quieter than campaigning rhetoric but more effective.
CLIMATE CHANGE AND SOCIAL WELFARE
So far, this chapter has focused on the obvious political tensions in the climate change debate. I turn now to a subtler question about how the debate should treat our responsibilities to the future. This is at the heart of the sustainability question: what we mean by sustainability is precisely about the legacy we will leave for the future. Looking at the impact of policies over a longer time horizon gets to the heart of how governments could deliver improved social welfare in other dimensions, too, not just environmental issues.
Consider one powerful critique of advocacy of radical economic change in order to reduce GHG emissions significantly. It says the impact of climate change lies in the future, but economic growth between now and then means that people will be much more able to afford compensating action when the time comes. We are poorer than succeeding generations will be, so it is for them, not us, to make the necessary sacrifices in terms of giving up consumption. This seems an appealing argument: it doesn’t deny climate change but postpones any need to sacrifice much if any consumption today, and so evades the difficult moral question about how to cut economic output while being fair to the aspirations of poor people in developing countries.
Surely this is too good to be true? Put so simply, it probably is. But the intergenerational issue has been raised by some of the economists who are most expert and thoughtful about the interplay between the demands of the environment and economic growth. William Nordhaus summed it up:
Global per capita consumption today is around $10,000. According to the [Stern] Review’s assumptions, this will grow at 1.3 percent per year, to around $130,000 in two centuries. Using these numbers, how persuasive is the ethical stance that we have a duty to reduce current consumption by a substantial amount to improve the welfare of the rich future generations?20
The question is how, as a matter of morality, we should treat people in future generations when we make decisions about consuming environmental resources now.