Economic science and perspectives for action: more than an energy tax!

The Matrix is a multi-year transdisciplinary project initiated in the Netherlands as part of the ‘Climate changes spatial planning’ programme. Its aim is to develop perspectives for action on climate change in a collaborative effort involving climate scientists, economists, spatial planners and social scientists. CE Delft is responsible for the project’s economic component. In this essay Sander de Bruyn looks at the various ways in which the economic sciences impinge on the climate issue. 

There is no denying that the economic sciences provide useful perspectives on climate change (cast-ing it as unaccounted damage, say), as well as to creation of concrete (policy) instruments like emis-sions trading. At the same time, though, they also spawn doubts and confusion about the need to in-tervene in the market process in order to avoid dangerous climate change. Much of this confusion arises because economists engage first and foremost with the question of whether climate policy is indeed desirable, to be answered in terms of whether or not the costs of market intervention exceed the benefits of reduced global warming. Economic science is unable to answer this question with any true accuracy, however, because climate change plays out in the (very) long term and economics is equipped above all to explain social phenomena ex post, not predict them. Any cost-benefit analysis of climate change simply skates over the major uncertainties surrounding numerous key issues, such as regional price and income trends across the world one hundred years hence.

When the power of economics as a descriptive science is brought to bear on the climate issue, it is immediately apparent that the costs of mitigation are in all likelihood being underestimated. That the problem of climate change can be technologically resolved at acceptable cost is the general message of the Stern Review, among other reports. In practice, though, climate change is not a technological but a social issue, characterised by complexity. Besides traditional market failures – which mean that climate damage is insufficiently priced, if at all – there are also government failures, which occur at two levels. In the first place, international negotiations will not yield the desired results as long as there remains a glaring imbalance between the wealthier nations, where the greatest impact will be expendi-ture on mitigation, and the poorer countries, which will bear the brunt of the actual damage as climate change unfolds. Secondly, the interconnectedness of trade and capital on a global scale has put nu-merous constraints on the scope for governments in wealthier countries to pursue effective climate policy.

Given all these limitations, economic science should adopt a more modest approach, restricting itself to designing mechanisms that reduce to a minimum the failures of both markets and governments.

The essay concludes by presenting three perspectives for action, three unorthodox strategies with the capacity to minimise the outlined failures. Internationally – at the European level, for example – agreement could be sought on creating a Carbon Added Tax (CAT) which, like Value Added Tax (VAT), would tax carbon on the consumer rather than the producer side, as is the case today. This would remove any incentive for producers to relocate outside Europe and thus shirk their responsibility for reducing global carbon emissions. Nationally – in the Netherlands, say – consideration might be given to extending the scope for climate compensation. If such compensation is increasingly accepted as the standard of the day, by corporations and citizens alike, and if the procedures involved are im-proved and extended (to include geo-engineering options, say), this could provide a bottom-up means of steering society in a sustainable, carbon-neutral direction. Thirdly, at the local level more thought should be given to more socially desirable forms of development, on residential or industrial estates, for example. Here there is potential for making car travel and other energy-intensive behaviour less attractive without the government evolving into a ‘nanny state’, as some would fear.