Where we economists are most useful in climate change discussions is the question of how to change the behaviour of humans and how to organise the production of public goods. Because the climate is a world public good, individual behaviour that affects it involves an externality and our training as economists leads us to particular answers as to what can be done about this externality. One of the main things that economists brought to the climate change debate early on is that in an ideal world, you would want to price the externality via taxes or trading schemes, rather than mandate behaviour directly.
There are three more things that economists know about public good provision that are absent from current climate change debates. The first is that when there are many players who have strong incentives to free-ride, then you will need punishment to induce cooperative behaviour. Voluntary sustained cooperation in the case that there is a clear gain of defecting is simply not going to happen. The second thing we economists know is that monitoring and taxation activities within countries and between them will be gamed, particularly by big business. What cannot be well-measured and taxed will be very hard to affect. The final thing we economists know is that public goods are more likely to be produced by agents with something to gain from it, which in the case of climate change means big countries negatively affected by climate change. Let us take each of these three in turn and show how the basic economics of public goods makes you look very differently at the issue of climate change from the way the debate rages in the mainstream.
Economists know almost everything there is to know about free-riding. We have tonnes of experimental data on it from games played amongst students and practitioners, and we have the whole history of taxation, public goods provision, and international cooperation at our fingertips, as well as the theoretical apparatus of cost-benefit analysis to explain that history. A brief look at history and at how things are organised within countries now tells you what you need to know regarding how to set up public goods, and it also tells you how likely it is that a world coalition will emerge to seriously curtail greenhouse emissions in every country.
Do we rely at the country level on kindness and generosity to fund our education, health, and defence spending, which are all public goods? No we don’t. We rely on tax obligations, with associated punishment for those who do not comply.
Do we then rely at the village level on the joint pride of the villagers to ensure that they bring their garbage to the dumps, that they abide by the traffick rules, and in other ways maintain levels of public goods? No, we don’t. We organise garbage collection so that it is free of charge to the individual villagers to have their garbage collection, and we have village cops who now and then monitor the traffick rules and punish the deviants. Social norms that reduce the need for monitoring and punishment are definitely important, but punishment helps maintain social norms.
Do we rely at the international level on the sympathy of dictators in order to motivate them to stop abusing their populations, whilst giving the right example in our own countries? No, we don’t. We have international courts, UN security councils, coalitions of the willing, etc., with the explicit intend to punish wrongdoers.
Hence why on earth would we think that in the case of climate change, we are going to get a world coalition whereby all the major players are going to constrain themselves in order to seriously reduce emissions? Which historical examples can we point to where you get big behavioural changes amongst 200 players with huge free-riding incentives just on the basis of appealing to their morality? I can think of no example. The only examples of coordination I can think of were either when there was little incentive to free-ride (such as in the case of the ozon treaty), or only a few countries affected (such as with landmines). To believe appeals to morality will work when the desire for more wealth creates huge incentives to free-ride within every country is essentially the mistake of the socialist experiment all over again in that socialism too started out with the belief that you can organise cooperation by appealing solely to morality. It is the sort of folly we pretend to believe on Sunday mornings in the church, not in the bright light of day.
This first piece of knowledge of economists about public goods thus points to the crucial role of some sort of real punishment of major countries that do not cooperate, or else some solution that can be implemented by a smaller group of countries who individually stand to lose from climate change. What is on the table – small promises by a few countries – is not going to work (which is why I keep calling the current policies symbolic).
The second thing we economists know is the importance of measurement. When it is impossible to measure an activity to any reasonable degree, then people will avoid taxation on it. This is why we don’t tax home production, even though it theoretically should be taxed. This is why we do not apply small taxes to the littering of public parks, but rather use inordinately large fines to compensate for the fact we don’t measure it with high probability, and we pay people to clean up the parks every day. Similarly, we do not tax noise pollution or people who piss in the ocean because it is too hard to measure, and instead we creates spaces where it is easier to monitor noise and effluence. Similarly, we often try not to tax for road use because there is a large cost in toll booths and electronic systems to monitor the use of roads. Instead, we pay roads from general taxation and live with the fact that some people get more benefit out of them than others. As a rule of thumb, if we cant monitor it well, we look to the government to produce some public good rather than attempt to control individual behaviour.
What forms of emissions are too hard to measure? Almost anything connected to agriculture, low-scale forestry, and small-business emissions is too hard to measure. So we don’t have taxation or emission markets for small-scale forestry, urban gardens, single-person firms, etc. Small users are all out of the taxation and emission loop, and we only get at them indirectly, for instance by changing the electricity price. But their emissions matter and if the incentives are high enough, they could start to by-pass the indirect taxation. Big firms can become small firms, or they can outsource their major emissions activities to small firms if the costs of being large start to include the fact that they then become large enough to be noticed and taxed for measured emissions. Farms and firms can switch to oil or coal generators that bypass the taxes on big electricity producers if the taxes are high enough.
This second piece of knowledge warns us about the limits of what can possibly be controlled in any emission-oriented scheme. Households can hide the emissions from their gardens, farms can hide them, small companies can hide them, large companies can hide them by becoming small or by moving to a country where they are not monitored, etc. This reality means that targeting emissions for taxation is going to be a very haphazard affair, very easily gamed. The best you might hope for is to target the places where there are a lot of concentrated emissions, like power stations, oil companies, or large forestry. Since it is perfectly possible to have smaller-scale usage of energy (including burning your own wood!), one should just from a measurement point of view be sceptical as to what governments who want to tax the externalities can achieve.
This second piece hence already points to the likely futility of trying to tax emissions, even if there would be a world coalition. It leaves you wondering whether there are other ways of influencing the climate that does not involve the measurement of emissions.
The final piece of knowledge concerns the question of what happens when there are many different players with differing incentives to produce public goods. From basic maximisation behaviour, we know it is the big players with a lot to gain individually who will make the largest effort to individually produce the public goods and to organise the rest. This is why the big shareholders monitor the boards of public companies. This is why the biggest mining companies spearhead the lobby against government action on climate change. This is why the countries with the most to gain from whaling spearhead campaign to broaden the hunt for whales. Etc.
This final piece of knowledge tells us where to look for possible action against climate change: amongst those countries who have the most to lose from climate change with the greatest resources to throw at it. In terms of agriculture, the losers are certainly not the US or Northern Europe (bar the low-lands), where agricultural yields are expected to increase. It is not places like Russia and China that you should look to either, because they too are projected to see increases in agricultural potential. Rather, it is places in low latitudes like Indonesia, Southern Asia, Southern Europe, and low-lying islands. They stand to lose the most in terms of agriculture.
Whether Australia is going to be a major loser is up for debate. Ocean warming and acidification is not likely to be good for us as it might destroy the Reef. In terms of agriculture, it is less clear. Despite what some academic papers have said about agriculture (Hennessey 2007), there will be areas where agriculture may prosper: things are like to get worse in the South-East but better in the North-West. Since we are talking about climate phenomena that take centuries to materialise, we should look at the effect over the whole country, in which case it is less clear cut than CSIRO reports would have us believe.
If you thus look at the likely winners and losers, as well as their resources, you will thus notice that the wrong countries are leading the current climate efforts. Indonesia, Polynesia, Micronesia, and India should be leading the way on this, not Australia and Europe. No wonder that the efforts to do something are so paltry: the effort at the moment is mainly for ‘feel-good’ reasons amongst players who might well secretly think they won’t individually lose all that much.
From basic economic history and theory you thus learn that the current mainstream debate misses the real issues. If you truly want a world coalition you have to talk about punishment of big countries who do not fall into line, which means you are talking about national sovereignty. If you don’t think that the punishment of countries like the US will ever be a realistic scenario, then you cannot talk about a world coalition. If you want to set incentives for emissions, you have to argue you can get to desired targets whilst having a leaking bucket in terms of many areas and players that cant be monitored. If you think the bucket is too leaky, you have to give up on emissions and look to something else that influences the climate. If you are looking to see who will lead the debate in the future, you have to concentrate on the big countries of low latitude or the low-lying islands in the world.