Symbolic Climate Policies, part III: how to produce climate public goods?

(cross-posted from Troppo. See here for part one and two and here for even earlier posts)

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.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

22 thoughts on “Symbolic Climate Policies, part III: how to produce climate public goods?”

  1. “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?”
    The abolition of slavery? There were some hold-outs (i.e. the Confederate states) who needed stronger measures, but appeals to morality were successful in most countries. And I suspect the appeal to morality made the direct punishment of hold-outs more palatable.


  2. Matt,

    slavery is interesting and it had crossed my mind when writing the post. I would point to the following aspects of the abolition of slavery:
    1. within some countries, it took a war to abolish the slavery.
    2. There was a dominant country that ruled the waves that could implement a virtual moratorium on slave trade via sea. You will note the Dutch didnt stop trading slaves till quite a bit after the English.
    3. Some countries didnt stop slave trading. Even nowadays, there are areas of thew world where you have de facto slavery and we are not really doing much about it. Debt bondage and feudal system are still with us and we are still not prepared to invade other countries to stop it.
    4. In the long run, there are excellent reasons why large-scale cross-country slave trade had to come to an end: stealing citizens from other countries is not in the interest of those other countries. Pure self-interest will kill most of the slave-trade that trancends borders.


  3. Good to see a fresh set of eyes on these issues.

    There is a large ‘mainstream’ community working towards national, regional and global deals that is well aware of these issues and has been for years. The ‘mainstream debate’ you are talking about is what can be read in the Australian newspapers; but there is a different ‘mainstream’ with more sophisticated recognition of all this.

    For example, while monitoring is understood to be a major issue, you would probably be seen to be drawing a long bow in concluding that taxing emissions is likely to be futile. Around 60% of emissions are from stationary sources that are fairly easy to monitor and transport which uses fuels produced in refineries that are easy to monitor. So there are difficult issues, but I doubt others who’ve been working on this stuff for years would follow you all the way. Especially when you look at the risks and costs of relying exclusively on alternatives to reducing emissions.
    Also there are many tools for eliciting cooperation out there that are already in use and will get picked up more intensively to get emissions down. Punishment is just one of them and participants in the international negotiations seem to be very cautious about using sticks if they don’t already have carrots on the table as well.

    Just two examples and there are many others:

    Various governments or supranational entities (including the current Australian one and the EU) have deployed the ‘conditional offers’ model: commit to cut x% but offer to go deeper than x if some metric of reciprocation is met. And indeed other commitments to cut are normally conditional as well. So you say that “what is on the table” is just symbolic ‘promises to cut’. But in reality, these are conditional promises, designed to demonstrate willingness to bear some pain, and offering to go further if others sign up too. Not an irrational approach.

    Various governments and others are also looking at taxing consumption rather than production, or putting tariffs on imports from economies without emissions caps or taxes.

    There is a growing list of sticks and carrots on the table for governments or groups of government to deploy to pursue their interests, including broader trade, investment and diplomatic channels, as well as climate specific ‘modalities’.

    So you’re right that ‘punishment’ is important, and broadly right that these things aren’t in the debate in the Australian press. And it’s true that the government has not properly positioned its proposed approach in the context of the bigger goal of eliciting reciprocation.

    On the other hand, current climate policy is not only symbolic and even ‘symbolic’ climate policy may be sensible if it’s part of a package. After all, making conditional offers and punishing others is likely to be seen as a mix of cheap talk and trade war action if it is not accompanied by a credible signal of our own willingness to incur costs: that is – actually incurring some cost unilaterally.

    None of this is to say that the way Australia has gone about it can’t be improved on. But it’s perhaps not quite as futile as you’ve argued in your 3 posts.

    What do you think Paul?



  4. Jim,

    thanks for your comments.
    I of course agree that these problems have not gone unrecognised entirely in international debates, though I am less impressed by the degree to which they have been acknowledged than you are.
    Let’s take the conditional offers of further reductions if other countries also promise more reductions. The carrot is very limited in that you cannot really design such conditional offers such that each individual country is pivotal, i.e. where the choice of each individual country makes a huge difference to the international efforts via knock-on promises of other countries. The reason you cant design conditional offers to be too sensitive to what every other country does is that the whole effort can then be scuppered by a single defaulting country who might coolly calculate it would actually benefit from a warmer climate. So you’re stuck with conditional offers based on what some majority does, which means the carrot is limited both in scope and in the set of countries is possibly applies to (it only has an effect on countries that lose with global warming. It makes countries that would benefit even more reluctant).
    Then to sticks, taxes on cross-national trade miss all the emissions generated within countries (which is a lot. China for instance digs up most of the coal it burns itself), and also increases the incentives for free-riding. A country that doesnt tax emissions would then attract high-emission industries that produce in that country. So international taxation without enforcement invites further free-riding.
    I agree that at the moment the majority of the emissions are in large visible organisations. Yet, reflect on whether that would continue to be the case if the taxes on such places get to be very large: you would encourage smaller-scale production of electricity and encourage refineries to emerge in countries that do not tax them. Even if you managed to kill 60%, a remaining 40% of current emission levels is enough to sustain climate change!
    So Jim, how do you envisage the world as a whole hitting upon a policy trajectory that cuts emissions by about 90%, which is what you need to get back to pre-industrial revolution levels and is a level mentioned in the Garnaut report? Just look at how much we squeal about 5% (and as I keep saying, my understanding is we are not going to hit 5%). If there is this level of opposition to such an insignificant target just think of the free-riding incentives for higher numbers.


  5. Given that parts 1 and 2 were completely demolished by Harry Clarke and others, this post brings to mind Monty Python and the phrase “It’s only a flesh wound”.


  6. Ricardo,

    that’s funny. And here I was, sure I would convince Harry and co of how wrong they have been all these years. ?


  7. Optimism would be naïve. The large distributional impacts across countries, industries, firms, individuals and generations make it hard to get to agreement. Cutting emissions can open up options to free ride. Governments disagree on the basis for allocating the burden of emissions cuts: historic or current emissions, total or per capita, etc. Many things have to come together.
    And yet it already seems absurd to many people to let the planet slide into the bad scenario and it will seem absurd to more over time; eventually a strong group of world political actors is likely to perceive climate change mitigation as a positive sum game. It is arguably already happening; per various comments on your other pieces, the commitments made at Copenhagen should be seen as commitments to early forms of action by major players. Realistically, building the institutions and culture to make this work takes time and effort. It’s easy to throw rocks at it and there seems no reason to think it inevitable. But some difficult things do get achieved.
    Assume for a moment that a few major actors on the world decide they want a deal. (It doesn’t have to be many, as world GDP is highly concentrated. US + EU + China is what, 60% of world GDP?) You might in addition have a few entities representing groupings of 2nd tier emitters who have made conditional agreements. You call it a mythical world coalition but in my view an acceptable deal is not unlikely once a majority of the biggest players form a broad shared desire to control the problem. And the distributional questions need not be insuperable: the small group may agree the broad brush and then negotiate in stages: figure out cuts for the first 10%, then do a later deal for the next 10. So I reckon a big emission cuts club is doable. Many would argue this is slowly forming already and there is a lot of analytical apparatus and negotiation about it.
    The 2 remaining issues are the arrangements with major and minor countries who don’t want cuts or don’t want big cuts; and maintaining a cooperative outcome with those who do want big cuts. These are related because the tools for managing each are largely the same and because it’s hard to tell apart those who don’t want cuts from those who do want cuts but want to free ride.
    Take the group who really don’t want to do it. The goal is to convert them by threatening them with sticks or offering to feed them carrots. Presumably a combination will be used. On the sticks, trade and capital sanctions may not be the first tool to reach for but they are there to be used by the entire club on individuals. The coalition can go a lot further than just emissions-content sanctions. The club – by definition – will be big enough not to need the opponents as the opponents will need the club. The carrots can take a variety of forms, too: access to technology; outright transfers, etc. See Copenhagen green fund for examples. Interestingly the current form has mostly been around carrots, not sticks – for the obvious reason that it’s a bit rich for the high emitters to suddenly whack sanctions on hitherto low emitters!
    Now to maintaining cooperation amongst those who perceive it to be in their interests to have a global emissions cut. Everyone will be tempted to fake it and free ride once the scheme starts up.
    First, detection of defectors is not nearly as hard as you think. Signing up to the benefits of the deal will entail commitment to (imperfect) verification of reports. Monitoring is expected to be pretty good through a combination of satellites (including for land use and forestry) and ground verification of reporting.
    Second, deterring ‘defections’ isn’t easy but neither is it a priori impossible. For defectors as for laggards, it has to made to be in each country’s interest to stick to the deal most of the time, and the cost of defecting needs to be credible, so there needs to be the occasional error that gets punished (which could be in the form of withdrawal or delay of reward). Of course, the whole set of questions of jointly inducing shared punishment have to be addressed: I can’t claim to know that whether there is a mix of instruments that is likely to work but I would expect that a broad range of commitment mechanisms will be tried and may turn out to be good enough. Once you add up all the gains from being a full member of the global community, you get to pretty big numbers that can be used by the majority club.
    None of the above gets near the state of the art on negotiation strategy around emission reduction agreements. And I don’t deny that it is a hard problem. But I hope I’ve at least waved my arms in the direction of arguing that if the costs of uncontrolled climate change to a majority of the small club of major powers come to be perceived to be very large, then that majority will be willing to devote resources to arriving and enforcing a deal. It’s not unreasonable to hope that they can achieve it using a standard set of devices.


  8. Border tariff adjustments have been extensively studied, provisionally approved by WTO etc. It’s wrong to say that this issue is missing from the debate.


  9. Hi Jim,

    you raise several interesting points to dwell on further.
    You firstly say that there is increasing desperation and that that might lead some of the biggest players to come together, start doing some cuts, and perhaps even force others to the table. I think that you are probably right, but unlike you do not think that even a coalition of the big 3 (US, EU and China) is able to achieve much. For one, it is damned hard for the Chinese government (or the non-existent EU government for that matter) to impose its will on its own provinces and burgeoning industries. In other writings, I argue that the central government in China is failing to enforce its own labour laws, and it would face far more trouble with regulating emissions. Hence for one, I think you over-estimate the degree to which the EU, US, and China can deliver on what happens in their own countries. Then there is the question as to what they can really force other countries to do. Bare in mind that you would want to go to about 90% reduction in emissions to really halt the problem. That is not a small adjustment but a complete overhaul of whole economies. Are the big 3 going to enforce their will on Russia, India, and others? Even the big 3 will squirm away from putting up the muscle for that. Also bare in mind that some countries are likely to benefit from global warming, so in order to bring them in line you will have to put sustained and serious bribes on the table. We are nowhere near that level of desperation. And you should of course also be aware that countries have changing governments. They cannot credibly commit to what they are going to do in 10 years time. Without real punishment independent of countries, the free-riding incentives extends to any initial starters too.
    So the scenario I see unfolding is not a world coalition around emissions because it cant be done. What I can see happening is a sub-group of desperate countries seriously looking at geo-engineering.
    Now, if there is indeed a future sub-group that adopts some form of geo-engineering, then of course everyone will claim that whatever they were doing beforehand was instrumental in helping that subgroup form. ‘We had to explore the other ways first’, ‘We had to experiment with cross-border cooperation’, ‘the emissions schemes helped form the ministries needed’, etc.
    My point is to keep pointing out that what our actual policies are is a no-hope road. If you like, I am urging us to switch to geo-engineering sooner rather than later.

    the tariff issue was further discussed on troppo. The kind of cross-border tariffs you would have to impose to force other countries into line are not on the table, and, as was argued at troppo, how do you use cross-border tariffs to influence domestic electricity use? The WTO is not writing blanco cheques on this.


  10. Cross border tariffs are very much on the table. Europe (France anyway) threatened the US with border taxes if it did not mitigate. The US Waxman-Markey Bill had BTAs as part of the legislation. Recently Europe has imposed BTAs on international air travel to it stemming from non-mitigating countries much to the annoyance of China and (hypocritically) the US.

    Import competing industries can equivalently be given a free emissions quota that is tradable. This can be designed to be equivalent to a BTA plus a lump-sum transfer and is very much a current agenda item in Australia.

    John Quiggin is right on the WTO rules. Provided taxes are levied on a consumption basis there will be no GATT rules inconsistency issues. Its the same thing as imposing a tax on imported as well as locally-produced cigarettes to discourage smoking. No big deal.

    If it was appealed then there are other provisions under the GATT rules that would justify such charges.

    The thing about BTAs is that a good BTA will be a threat and not imposed. That was the case under the Waxman-Markey Bill since there was a time before the move would be introduced.


  11. I am far from an expert on either the geopolitics of climate action or the economic / industrial issues around climate pricing but your assertion of futility on the latter appears to be a classical example of one of the most common fallacies in economic policy analysis – using the limitations of a policy instrument to completely reject it.

    For a start, there are surely significant industrial limitations on the ability of firms to “out source” action high emmission industrial processes to avoid paying the climate tax or having to purchase / use permits.
    To the extent that this option is available the entire investement in developing and operating the new supply chains, the efficiency losses of scale etc would have to be less than the emmission price at the least or the cost of investment in emmissions efficiency.
    To just assert that pricing emmissions is “futile” due to the thredhold issue of its application demonstrates a complete lack of marginal thinking.
    Pricing of carbon cannot (like any policy instrument) be implemented perfectly (i.e. in a second best world, with costs and limitations to information and with powerful vested interests and social anxiety to change) however it is favoured by the vast majority of economists as it is the most efficient mechanism to achieve the emmission reductions we have committed to.
    Also missing from the analysis are the potential benefits from pricing that exist even if half the worl never acts. The price will encourage investment and innovation in all affected industrial processes as well as abatement technologies that, surely in some sectors, will ultimately result in increases in exports of goods and services as well as IP revenues
    Finally, one potential overlooked on the geoploitical issue is mass consumer led boycotts of non-acting countries. I simply cannot see a future where Australian innaction, given we are apparently the biggest emmiter per capita, will not result in adverse treatment in the future.
    Thankfully we are pricing GHG emmissions.


  12. Harry,

    there are two main points to make about the WTO and other voluntary international trade agreements (and I am here taking my cue from a recent wto paper on the state of play
    1. The cited paper is not very optimistic about the ability to impose bilateral import tariffs on the basis of the production processes in other countries. Article III of the WTO might allow it in principle, but the jurisprudence on its application insists on precision which by design will be exceptionally hard. Article XX on public policy is more liberal but is yet to be tested. As the cited paper concludes: “In exploring the interface between climate change policy and the trade rules, this paper concludes that there are several areas where potential exists for friction that could both weaken climate change efforts and undermine the trading system. This danger could be minimized if governments were to find ways of identifying mutually beneficial trade-offs as they react to the need to avoid climate change. But deeper cooperation would be needed than what we have so far witnessed.”
    2. How much do you expect from import tariffs, export subsidies, and consumer boycotts? In order to get to 90% reduction in emissions you are not just talking about getting countries to adopt slightly less emitting production processes. You are talking about an overhaul of how things are done internally in those countries. They would have to re-wire their own electricity system, their internal transportation systems, etc. Is the rest of the world really going to boycott the import of, say, Russian gas if they refuse to build more nuclear power stations and swap their cars for bikes? Such boycotts are subject to free-riding incentives and seem very far-fetched.

    to focus the mind on the task you face in getting a 90% reduction, just consider the private use of liquid fuels. In principle, you can use cooking oil, oil from biomass, alcohol, etc. to fuel your personal energy use. You will hence have to tax all of them. If you want to reduce that liquid fuel use by 90%, then the question will be how high you have to push the price to get to 90% less demand. Let’s take an optimistic estimate of -0.6 for long-run demand elasticity. To get to 90% reduction would then mean a 4700% increase in the price. Your bottle of canola oil from the shop hence just went from 3 dollars to 141 dollars. Can you imagine ways in which small firms might produce that oil for a lot less and sell it to you illegally? I can. It will make the prohibition seem easy.


  13. Paul, isn’t the target for Australia firstly 80% and by 2050 (i.e. 39 years hence)?
    To derive prices from demand elasticities over that time frame and price range is pretty silly i would have thought?
    To that extent that the price rises to a level where perverse behaviour in the “too hard to price” space becomes significant, then yes, regulation / prohibition will become useful as a compliment to a carbon price / ETS, NOT a substitute


  14. Matt,

    the 90% figure for 2050 was in chapter 12 of the Garnaut report as a suggested target. We of course as a country do not have a binding target anywhere near that number (so dont expect emission policies to affect climate change in the next 50 years even if you buy into the story that the world coalition is about to be formed). You find the 90% in many publications talking about what we need to do to become climate-neutral again as a world. Of course, given the current trajectory of increases in emissions (and 2010 was no exception), by 2030 we will probably be talking about 95% reduction targets.
    The quoted price elasticity is a well-known long-run estimate, i.e. applicable to decades rather than weeks. The current debate on influencing behaviour is about decades. If you want to talk about centuries, then of course other elasticities might apply about and we cannot say much about them. As historians like to joke when asked about the causes of the French Revolution: “its too early to tell”.
    The point of calculating what you need to do to fuel prices at current estimates of demand elasticity is to get some realism into the debate as to just how draconian we are going to have to become to get to the stated long-run emissions reduction targets. Even if my stated estimate were out by a factor of 10, it should be clear that there will be a huge wedge between the actual private cost of producing something and the social costs that includes the emission externality. You then begin to realise just how impossible the monitoring task is going to be and hence the futility of the road we are on. You might need a policeman for every tree to prevent it from being cut down and burned in some illegal private furnace.
    So your only real hope is technology. Either a new form of energy generation that is close to competitive with fossil fuels or a geo-engineering technology to steer the world climate to a desired target.


  15. “The point of calculating what you need to do to fuel prices at current estimates of demand elasticity is to get some realism into the debate”

    Sorry Paul but the more you try to defend your position the more you are demonstrating a lack of “realism”. You are using some long-run elasticity of demand to analyse the impact of a CO2 price, for massive price increases decades into the future.
    Without knowing much about how these “long-run” price elasticities are calculated I am assuming that they are arrived at by historical regressions of changes in fuel demand given changes in prices. So what you are effectively doing is using historic bahaviour of firms and households responding to highly volatile prices that have maybe doubled or trippled over decades and extrapolating out that behavour decades into a future a) where we know prices will increase considerably.
    Forget the function of GHG price in driving investment in new technology research and innovation for a minute – at the absurd prices you’ve estimated there already exists technologies in each of energy, manufacturing, materials and transport that would be competitive substitutes far below those price levels.
    And a policman for every tree? Yeah, that’s “realism”
    No, the centrepiece of action to reduce GHG emmissions remains a price. Regulation/prohibition and national/global level investment in geo-engineering are potentially useful / prudent complimentary measures


  16. Matt,
    “So what you are effectively doing is using historic bahaviour of firms and households responding to highly volatile prices that have maybe doubled or trippled over decades and extrapolating out that behavour decades into a future”
    yep, that is exactly what I am doing. Historical prices have varied by a factor of about 6 (a trough in 1998 and a high in 1980 or 2008). The historical observation has been that 600% price changes did remarkably little to demand, from which I indeed suggest that we will need huge taxes on liquid oils to get at 90% reductions, which in turn leads me to the question whether this is enforceable.
    What other method do you suggest to get some realistic idea as to the price changes you will need to get a desired behavioural change?
    At the end of the day, it is you that is arguing for the minority position, i.e. that our current policies are going to lead to massive changes in world emission behaviour. I dont see the rest of the world believing this and am giving you arguments for why the majority may be right and the local minority supporting current policies is wrong. In those arguments, I extrapolate from history. What are you extrapolating from?


  17. 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?
    The Treaty on the Non-Proliferation of Nuclear Weapons and the Geneva Conventions, to name just two. Both have, of course, seen minor instances of cheating, but not sufficient to fatally damage them.
    It is a truism that the community of nations is anarchic, and most co-operative endeavors between nations end up appealing to their morality. This seems to be generally more successful than appealing to the morality of individuals, because the behaviour of nations largely represents the collective will of their citizens, each of which individually has little direct incentive for their nation to cheat.


  18. On the measurement issue, the same applies in principle to the distillation of spirits – yet we manage to apply a very high excise to them, including home distillation. If you produce spirits at home you are required to have an excise manufacturer license, and you cannot even own stills that are not used for alcohol production without applying for permission.


  19. Sorry Paul where did I say “that our current policies are going to lead to massive changes in world emission behaviour.”??? The construction of straw men is poor form given the standards on this forum.

    We have committed to a reduction in GHG emmissions and the most efficient way for us to achieve it is through a carbon price.

    “……I extrapolate from history. What are you extrapolating from?”
    Where quatitative evidence is clearly and fundementally inadequate, I rely on reason, rather than to rely on the blatantly weak evidence!


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