鑽石舞台

We must pay the cost ofcarbonif we are to cut it

Shouldn’t we be doing more to respond to the climate emergency? It’s a natural question to ask. But, perhaps, we should turn the question around, and ask: why haven’t we solved the climate change problem already?

Economicssuggests a ready answer: externalities. Unfortunately, the concept of externalities is a century old, and it shows. So why do economistspersistin using this dusty old term, and is it still useful?

An externality is a cost — or sometimes, a benefit — that is not borne by either the buyer or the seller of a product. And, if neither has to bear the cost, neither has much reason to care.

This is not the way a market usually works. Normally, when companies make the products that surround us, they have plenty ofincentiveto cut every possiblesourceof waste.

Consider a familiar product: a can of lemonade. The first such cans, produced in the middle of the 20th century, weighed about 80g when empty. Now they weigh just 13g. Thesavingin weight means the can manufacturers have to pay less for materials and transportation.

It costs less to put a can of lemonade in front of you in a shop, and that means either the manufacturer and retailer make more profit, or that you pay less for your lemonade — or, often, both. The cans are also easier to open and less likely to give the drink a metallic tang. A better product, for less money — that is the way the free market tends to work.

But not necessarily. Whatincentivedoes the drinks maker have to reduce thecarbondioxide emissions from themanufactureof the drink — for example, by using renewable energy inrefiningthe aluminium? Not much. The mainincentivewould be if renewable energy were cheaper.

Thecarbondioxide emissions are hardly aconsiderationfor a profit-seeking firm. And, as the consumer, you have akeeninterest in the price and the quality of the drink. But thecarbonemissions? Any worries you might have are rathervague. How would you even know which soft drinks produce low emissions? Even if you did care, other customers might not.

That, then, is the externality problem: a seller makes a product, a consumer buys the product, but thegreenhousegas emissionsassociatedwith that product are of no real concern to either of them. An army of designers, engineers and technologists may be deployed to shave afractionof a penny off the cost of producing each product — but reducingcarbondioxide emissions is an afterthought.

So what can be done? There is some room for consumer pressure: we all want to feel that we are doing something to help. But consumer pressure only goes so far: we may have only afaintidea of products are doing the most harm to the environment, or where the easiestimprovementscan be made. Some products attract a lot of attention, while others fly under theradar.

Policymakers coulddirectlyregulatethe market. That can work for some large and obvioussectorsof theeconomy— for example, we know that coal is asourceof energy that produces a huge amount ofcarbondioxide, so policymakers could ban the use of coal-fired power stations. Anotherstraightforwardregulation is to require more energy-efficientcars or washing machines.

Governments can also try tofundinnovationsthat might solve the problem, frombatterycharging to low-energy lighting. But these efforts only go so far.Temptingas it is to think of thetransitionto a cleaneconomyas a hugeleap, it is in fact a trillion tiny steps — the steps that each of us take, many times a day, all around the world, when we decide how to live and what to buy.

In each of these trillion steps is an externality: a cost borne not by the buyer or the seller of a product, but by all ofhumanitynow and in the future. And, unless we caneliminatea trillion little externalities, we areunlikelyto solve the problem.

In 1920, the economist Arthur Pigou produced aformaldefinitionof an externality, andproposeda way to solve it: a tax in directproportionto theexternalcost. In some cases, this 「Pigouvian」 tax is hard to calculate. But, in the case ofcarbonemissions, it should be possible to tax coal, oil and natural gas when it is firstextracted.

It has been encouraging to watch the world finally start to mobilise action on climate change — and even more encouraging to watch the rapidly falling costs ofsolarand wind energy. Acarbontax would help to push this clean energy revolution forward — and into the decisions each of us makes every day.