sensible middle in the climate change debate: carbon pricing

The sensible middle in the climate change debate

The sensible middle in the climate change debate: carbon pricing
Climate and Energy Pollution

This Economy Lab, Report on Business piece by Chris Ragan originally appeared in the Globe and Mail on December 30, 2014

An overwhelming scientific consensus holds that the rising atmospheric concentration of greenhouse gases is changing the global climate and presenting humanity with enormous challenges. This consensus also holds that climate change is largely driven by human actions, especially the burning of fossil fuels. Yet among the majority of the population who takes this consensus seriously, there is a highly polarized debate.

On one side are people who think we need to resist the lure of economic growth, abandon our relatively free markets, and return to a simpler way of life. According to these people, we need governments to help us “change everything.”

On the other side are people who know that dealing with climate change will require large-scale technological changes, but simply trust these changes to appear as the need arises. In their view, governments can rest easy and “do nothing.”

As is often the case in such polarized debates, there are grains of truth on both sides. More importantly, however, both sides make massive errors. The more sensible approach to dealing with climate change is somewhere in the middle.

The problem with those who want to “change everything” is their failure to appreciate the tremendous power of free-market capitalism in advancing our long-run living standards, largely through the profit-driven processes of invention and innovation that create new products and also better ways of producing existing ones. But their grain of truth is that free markets are unable to deal with environmental problems without some guidance from government.

The problem with those who want to “do nothing” aside from putting their faith in technology is their failure to recognize that technological change doesn’t usually just happen. Yes, there are examples of scientists beavering away in their labs, driven only by their own curiosity, and making remarkable discoveries; the invention of the laser and the breaking of the genetic code are good examples. But most technological change occurs because researchers are working to solve real-world economic problems, motivated by the idea that their success will pay off financially. The development of the personal computer, the creation of the mass-production assembly line and the invention of cellular technology are just three out of countless examples.

If each of these polar views is mostly wrong, what is the sensible approach to addressing the problem of climate change?

The sensible approach needs to admit the power of markets in organizing our economy and allocating scarce resources. But it also needs to recognize that when the costs associated with the emission of carbon dioxide and other greenhouse gases is not included in the prices of goods and services, free markets cease to work their usual magic. In these situations, the faulty price signals embodied in Adam Smith’s famous “invisible hand” can be corrected with policies that require polluters to pay a “carbon price” whenever they emit greenhouse gases.

At the same time, the sensible approach needs to recognize that dealing with climate change will require enormous advances in our technologies, especially those dealing with the production and consumption of energy. This points to the importance of creating market-based incentives for the private sector, so it can continue to play its historic role in the rapid and efficient development of new and powerful technologies.

Putting all of this together gets us to the essence of an “ecofiscal” approach to dealing with climate change. There are two distinct parts to ecofiscal policies. First, by requiring a carbon price to be paid whenever greenhouse gases are released into the atmosphere, households and businesses would have a strong economic incentive to reduce their own emissions. At the same time, since everyone would now have an incentive to use cleaner forms of energy, a powerful profit motive would drive businesses to develop cleaner technologies and energy sources.

The second part of ecofiscal policies is just as important. The use of carbon pricing would raise revenues for governments, and these revenues could be used to generate further technological gains. The revenues could be used to drive general technological advances, by reducing taxes on investment or profits, or they could be used in a more directed way to support the development of clean, non-emitting technologies.

The debate about how best to solve the problem of climate change has unfortunately become polarized. But the argument to “change everything” is as wrong as the argument to “do nothing.” The sensible middle way would use an ecofiscal approach.

2 comments

  1. Kendelabarre

    I am tired of hearing “It is only the government or the private sector” There is an enormous “other” and very powerful sector comprised of NGOS, social enterprises, state owned businesses, cooperatives, and employee owned pension funds, and last but not least indigenous owned organizations that can do everything, and in many cases MORE than the private sector or even governments who too often are tied down by their out of date ideologies.

    Raven, like too many other experts , is missing in action on this important economic and social dynamic.

  2. Emile Rocher

    There seems to be an underlying attitude that we need technological advances to make lowering our carbon footprint practical or suffer significant impact to our standard of living. We already have the technology. Buildings can be retrofitted at a profit to cut energy use in half, with the savings paying for the upgrades. Good design in new buildings can achieve dramatic energy savings at no marginal cost ; we only need to change our obsolete building codes. Coal fired electricity generation , one on the single biggest greenhouse gas contributors can be economically displaced by a combination of decentralized renewable energy and gas fired co-generation.
    A 5.5kw grid tied photovoltaic system has over the past 18 months, generated 100% of our home electrical demand during on an annual basis with enough surplus to drive our electric car 13,000 km per year. The surplus electricity is generated during daylight hours when the grid demand is highest , peaking automatically at times of peak air conditioning demand during the summer.
    Alberta, which has the best renewable wind and solar resources in Canada, has adopted a solution to increasing electrical demand that involves building $13 billion in new transmission lines from the North , where coal and steam assisted gravity drainage tar sands production are located. Natural gas is extracted by fracking beneath our home, shipped by pipeline 1000 km north to be burned in co-generation plants , with the heat used to generated steam to liquify bitumen. Surplus electricity can then be fed into these new transmission lines back to our house (with 6% loss along the way). The bitumen is diluted with lighter liquid hydrocarbons ( also shipped north) to upgraders , refined into fuel which is shipped by road to local service stations. Consumers pick up 100% of the 13 billion with increased transmission charges. This is a massive subsidy to a single industry and unbelievably inefficient. Natural gas at current prices used in a residential sized co-generation unit such as the Honda freewatt can supply electricity for an electric vehicle at a fuel cost of 2 cents/ km while heating the home for free. Fuel cells , which will improve efficiency even more are already being used in larger heat and power applications and being commercialized from ever smaller applications.
    We seem to be stuck in the “energy superpower” vision , whatever the cost and consequences and it appears that tanking oil prices have begun to point out the fatal flaws in that vision. Investing in renewable energy and wiser use of fossil fuels in anticipation of a time when their use will be regarded as favorably as smoking in a car with small children is a much more prudent course of action and only requires removing the existing subsidies on fossil fuels and attaching an appropriate cost to their continued use.

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