While discussing the issue of climate change, most people now accept that a solution must involve either a tax or a permit system to reduce emissions and create the incentives for lower emission technologies. Most people also assume that such policies must be coupled with active governmental regulation of certain industries, car-emissions standards, decommissioning of power-plants, alternative-fuel blending specifications, subsidies to research and countless other governmental enterprises. My opinion is that governments around the world should work hard towards implementing a proper carbon market or tax system, and do absolutely nothing else.
All government efforts at subsidizing research, mandating blending-specifications or installing emissions standards are probably futile but more likely counter-productive. Further, even if such measures could potentially prove positive, politically, they are likely to distract from the need to establish a proper market/tax system, which is the only way to solve the carbon crisis we face. To illustrate this, I will discuss three of the most popular ideas that are suggested as courses of action for governments to take, and outline some problems with them.
1- Subsidizing research:
Everyone suggests that the government should spend billions of dollars researching alternative energy, and trying to find the next clean and cheap energy source that will solve all of our problems. The analogy has often been made between the quest for new energy and The Manhattan Project. This analogy is very inaccurate, however. The Manhattan Project aimed at achieving a single goal and appropriating it for the US government; the point was that this aim—a nuclear bomb—would be kept with the American government, and not released onto the market for people to sell and make profit off. This is very different in the case of energy, where if we come across a new useful technology, it will have to be widely disseminated and applied for it to be effective. As such, there is an enormous opportunity for profit to be made out of this and consequently, incentives for millions to look into a solution.
Another difference is that we fundamentally do not know from where the solutions to our carbon problems will come. There are countless potential solutions and scenarios, and millions of people around the world working on devising the next big thing. Whether this will come from hydroelectric, geothermal, nuclear energy, biofuels, carbon sequestration, liquefied gas or any combination of the above remains an open question that no one with any knowledge of energy could ever dare answer with any confidence. Seeing as such, there are endless possibilities for research agendas that could uncover a sustainable and clean energy path for human use, and a government will simply not be able to know each one of these, or to fund them all. And of course, no government will ever be able to truly determine when such a research effort is a “success”, since world consumption of energy is an enormous complex system whose complexity precludes it from being analyzed properly in a lab. For a technology to be truly successful, the only way to demonstrate its success is for it to succeed in reducing carbon in the real world in a cost-effective manner. Therefore, since the profit motive exists, and the governments of the world need to ensure that markets can capture the negative effects of carbon to produce this incentive, governments would do best to just align the incentives for innovation to “let a thousand flowers bloom” and allow everyone in the world to proceed with their innovation trying to minimize their costs. When all the energies of every single consumer of carbon emissions in the world is dedicated to reducing carbon emissions and minimize costs, it is probably safe to trust that the collective intelligence of humans will be able to work on such a problem better than any government-funded project, no matter how big.
Finally, those who advocate large government spending forget something very important: governments have indeed spent a lot of money on such research, with results that are mixed at best. Biofuels, on their own, have received subsidies over the last 5 years alone that match the total amount of money spent on the Manhattan Project. All that this money has achieved so far is subsidize corn-farmers and allow them to continue producing ethanol from corn; an exercise as prudent as burning $100 bills, though much more harmful to the environment. We have to remember that government subsidies for research will be directed according to political agendas, lobbies and special interests. For every good dollar spent on research, there will be 10 spent on Iowa corn and other such white elephants.
2- Fuel-blending specifications:
One of the most popular fads in energy circles today concerns mandates of alternative-fuel-blending specifications. If only we would mix enough renewable fuels with our gasoline, we are told; we will reduce emissions and solve the energy crisis in one shot. This is not only wrong, but actually very dangerously counter-productive. When mandates for such blending are passed, the government is artificially increasing demand for supposedly “sustainable” or “green” fuel and causing an enormous increase in its production. To begin with, no one can know with much certainty whether such fuels are indeed “sustainable” or “renewable”, but it is highly likely that when demand for them is boosted by such mandates, their production processes will become very harmful to the environment.
The EU directive on biofuels is the best such example. By mandating a 5.75% biodiesel blend in European diesel fuel, the EU has now increased the price of biodiesel to the extent that whole forests are being cut down in Indonesia and Malaysia to meet the market demand. While this elaborate hoax is possibly reducing emissions from European tailpipes, it is increasing emissions from the production and transportation of fuels from all over the world, and more importantly, from the enormous amount of deforestation it causes.
Whether biodiesel will ever be an efficient fuel is not the main question here; it may indeed be a good fuel to utilize one day. The point is: the only way we will ever know if it is indeed useful is by setting a market/tax system that internalizes all the emissions from the production of such fuels, and allows the market to determine what is best. Such a system would surely not result in massive deforestation in order to slightly reduce European tailpipe emissions.
3- Emission standards
The specter of mandating that all new cars be made with a certain level of emission standards is an initially attractive one. It could, possibly, lead to reductions in the production of CO2. But without a proper market/tax system that reduces the ability to emit CO2 everywhere in the economy, this effect is likely to be transitory: reduced fuel consumption in cars will probably be compensated with increased consumption of fuel in other sectors of the economy, unless we have an economy-wide tax or cap that limits total emissions of CO2. But once we have such a tax or cap, then it is pointless to waste our time figuring out emission standards for cars, since the tax or cap will reduce emissions all across the economy in a sufficient way, bringing about reductions in car emissions as well, if they were to be needed. This same argument could be applied to mandates of efficiency on power-plants, airplanes, or any other major source of emissions. Attempting to address these issues one sector at a time is similar to trying to squeeze a balloon: squeeze one side and the other bulges.
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These measures, while they might appeal to voters and well-meaning environmentalists, constitute no more than what might be called environmental tokenism—they will show that you care, but they will not make any real difference to the world.
Perhaps the biggest problem with all of the above mechanisms is that they distract from very important and useful political momentum towards solving climate change. Now that the battle of public opinion has been largely won, and most people in rich countries are sold on the need to act against climate change, we run a serious risk of being stuck in years—or decades—of hand-wringing environmental tokenism, where electorates continuously demand—and get—little incremental token steps that achieve nothing.
A US or European politician could probably pursue a very successful re-election strategy by continuing to give out subsidies in the form of “research funding” for their cronies, while delaying real action on a market or a tax that would force these cronies to act seriously on emissions, all while appeasing the public with all their spending and emissions-standards and meaningless regulations. As such, a pretty sustainable political dynamic is set in place where different interests are met in different ways, and real action is never taken.
What we need is to utilize a carbon tax or market that will lead to a sufficient reduction of emissions. However, designing, implementing and monitoring such a system is by no means an easy feat. I have so far deliberately blurred the distinction between a carbon tax and a carbon trading systems, though in reality, these are two very different things. Governments need to decide which is the most effective form to use; what initial prices, quantities or tax rates to set; how to monitor this system, and how to ensure that it doesn’t cause too much economic turmoil. Perhaps even more difficult than all of this is trying to establish an international consensus around making such a system truly global in its reach, and doing so in a way that does not hinder the development of poor countries and make the poor of the world bear the majority of the burden. These are all serious and complicated problems that will not be solved in a day. The sooner we start working on them, the better. The less time, money and political capital we waste on tokenism, the greater our chances of success.
If there is going to be real action on climate change, there is no alternative to reducing carbon emissions, and there is no better way to reduce carbon emissions than by enforcing a proper tax or market for carbon. Everything else is at best time-wasting, but at worst dangerous fiddling while the planet burns.
For more of my writing, see TheSaifHouse