Economics And Climate Change

I am confident that global climate change is real.

I am also confident that over-complicated knee-jerk legislation and taxation will make matters worse.  Problems get solved by rational actions, not panic attacks.

Either economics stands on science or it stands on quicksand.

The principles of taxation are not founded in science.  But they could be.


The world is faced with a problem in need of a solution.

The problem is this:

CO2 is known to be a greenhouse gas. We have been using the atmosphere as a dumping ground for CO2 ever since coal and peat were first used as fuels.  Since about 1860 the planet has not been able to sequester CO2 as fast as we have been putting it into the atmosphere.

Excess atmospheric CO2 causes global warming which leads to greater evaporation of water.  Atmospheric H2O is a greenhouse gas which works at some of the same wavelengths as CO2 but which also plugs some of the gaps in the spectrum.  It thus tends to amplify the global warming effects of CO2.

CO2 drives global warming, and global warming drives climate change.

The only solutions to this problem so far proposed bear costs which are out of all proportion to the climatic certainties.  In addition, proposed solutions will be entirely ineffective if carried out by only one or two nations.  The danger is that any nation acting alone in implementing any solution so far proposed will probably suffer bankruptcy and/or regime change. 

The problem of tackling CO2 emissions is rather like the problem of nuclear disarmament - every nation wants to see another nation act first.

... accountable politicians of today are faced with three major problems. The problems are demographic, ecological and economical. And we may as well eliminate the extreme solutions right away. If a country decides to be the cleanest in the world, it will soon also be the poorest. Regulations and price increases will put a halt to the productive capacity. Exports and income will decrease, workplaces will disappear and so will the possibilities for taking care of health problems and social problems. The country will be clean and poor, misery will spread, there will be social unrest, the government will be overthrown and the new regime will decide to produce its way out of poverty.

This new regime will move to the other extreme: Producing wealth and jobs without caring for anything else. The natural resources will be exploited, there will be an unlimited consumption of energy, cheaper products, growing exports, employment will increase, the population will be well off seen from a material point of view, and everything will seem fine. But only for a while. Then the problems will begin to emerge: Health problems, environmental degradation and loss of natural resources. Environmental movements will appear, there will be social unrest, and also this regime will be overthrown.

Both of these regimes are therefore unsuited when it comes to solving our problems.

...

The climate challenge facing us today is the result of a process largely attributed to the industrialization that started two centuries ago. We are now learning costly lessons for unsustainable development over past generations...

It is easy to lapse into thinking that we have two hundred more years to transform our societies into low-carbon economies. This would be a big mistake. The fact is that we may only have a couple of decades.

“The Greenland Dialogue – Views on Climate Change ”

Ilulissat, Greenland, 16 – 19 August 2005.

Opening and welcome address by Dr. Per Stig Møller,

Minister for Foreign Affairs, Denmark.

http://www.um.dk/en/menu/aboutus/theministerforforeignaffairs/speechesan...

Given what we know about politics, economics and human psychology, Dr. Per Stig Møller's arguments are sound.  But do we really know enough about politics, economics and human psychology?


Towards a solution

In order to adequately address a known problem it is necessary to examine the logical consequences of all possible solutions.  Even the crazy ones.

The craziest idea of all is that one nation, acting alone, can make a significant difference to global CO2 emissions, global warming and hence global climate change and make a profit.  It is such a crazy idea that it gets dismissed out of hand.  When anyone rejects an idea out of hand as 'obviously wrong' I tend to examine the idea very closely.  Common sense is often a fog which hides the truth. 

I may be the only person on the planet that thinks this way, but I believe that the first nation to found its economy on using, year on year,  ever less fossil fuels will not soon be the world's poorest nation.  It is more likely to become one of the world's richest nations.

I am going to throw down some ideas to see what others make of them, to find out if anybody wants to hear my drum.

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.
Let him step to the music which he hears, however measured or far away.
Henry David Thoreau (1817–62)

Rethinking economics

Economics is the study of how humans exchange goods and services as individuals and groups.  Economics is thus a sub-discipline of human behavioral studies, a sub-discipline of cognitive science.  Any economic theory which is founded on the idea that consumers act rationally is prima facie counterfactual.  Many businesses employ psychologists to help them come up with the 'right' color or shape so as to appeal to shoppers' sub-conscious behaviors.  Consumers may rationalize their wants as 'needs', but that doesn't make the average consumer transaction any more rational.

According to economists, people vote for products with money.  Not quite.  The voting scheme is a gerrymandered banana republic scam.  A flood of inferior goods will collect more 'votes' than a small volume of a superior product, even at the same price.  If the making of a superior product comes at the price of lower volume or higher prices then there will be a pressure tending to drive the superior product out of the market.  There is a related assumption behind trademark and copyright laws: inferior goods drive out superior goods.  If a market is flooded with cheap and inferior fakes which look like the genuine product then the reputation of the genuine product may be irreparably damaged.

People don't vote for quality with money, but with lawsuits.  The higher the price of a thing compared to a person's income, the more likely they are to bitch and scream if it's faulty. As a general rule, the higher the price of an item, the more likely it is that the end user can contact the original producer for remedy and at a cost which is trivial compared to the cost of the item.

The costs and difficulties of communication between consumer and producer vary in some inverse proportion to consumer cost.  Monopolies make this communications problem worse.  The average consumer can buy a 20 Watt computer in preference to a 200 Watt computer.  But the same consumer has no choice over how the electricity is produced.  Given a national grid and a single power line into every home, how is a consumer supposed to 'vote' for clean energy?

When politicians see a problem which isn't going to be solved by capitalist economics as currently understood they fall back on ancient control mechanisms of universal application: regulations and taxes.

In my next article in this series I propose to show that targeted taxation is to economics as perpetual motion is to physics.  Trying to take from the rich and give to the poor is like trying to bail out the Atlantic with a teaspoon.  Robin Hood was no economist.