People like to think that economics is a strange, mysterious place that only those with a Ph.D or two could possibly understand. Nothing could be further from the truth. Economics is nothing more than a way of talking about the choices people make every day of their lives, choices that hinge on the value we place on a range of competing ideas. Would we rather have a reliable car or a vacation in Tahiti? A Ferrari or a Hyundai? Guns or butter? A college education or owning a franchise? Coke or Pepsi?
Almost everything we do involves such a decision-making process. Some place a higher value on having a reliable car. Others choose to kick back on beach in Polynesia. Trying to understanding those choices is what economists do. In general, absent non-economic factors such as prestige or fame, we tend to choose the least expensive option. Try to walk through a grocery store without comparing the price of everything on the shelf. Quite simply, we are programmed to seek out the least expensive option that fits our needs the majority of the time.
Sometimes there are distortions in the economic calculus, however. For generations, rivers and streams around the world were treated as sewers placed there by nature so manufacturers could dispose of their waste products without paying anything for the privilege. Textile mills discharged the dyes used to make cloth into the nearest waterway. 100 years later, the granite walls along the Blackstone River in New England are still stained red, blue, or yellow as a result.
The skies over our head were also seen as an infinite space where steel makers and utility companies could spew their waste products free of charge. The atmosphere was deemed so vast that nothing humans could do would ever have a noticeable impact on the air we breathe. Until it did. One day, we woke to find aerosols known as flourocarbons were destroying the ozone layer that shields the Earth from dangerous solar radiation and that pesticides were endangering many plants and animals. The world mobilized to fight the threat and within a few short years the ozone layer was repaired and the most deadly pesticides were banned.
Today we are faced with a much greater crisis. Carbon dioxide and methane from extracting and burning fossil fuels are causing the Earth to get hotter. There is a significant risk that the higher temperatures may led to the extinction of millions of species, including humanity itself. And yet, unlike those prior crises, there is a general paralysis about what to do about the situation we have created.
The International Monetary Fund released a report last week that resorts to classical economic theory to solve the problem. How? By making polluters pay the costs imposed on society by their pollution. During the Obama administration, US policy makers attempted to legislate good behavior through rules and regulations. That lead to enormous pushback from corporations which essentially argued that they have a constitutional right to pollute all they like and there is nothing the government can do about it. It’s all about the land of the free, Manifest Destiny, the right to bear arms, and unbridled greed.
The IMF makes its position very clear. Put a price on carbon emissions. It claims a carbon fee is “the single most powerful and efficient tool” because pricing mechanisms “make it costlier to emit greenhouse gases and allow businesses and individuals to choose how to conserve energy or switch to greener sources through a range of opportunities. People and firms will identify which changes in behavior reduce emissions — for example, purchasing a more efficient refrigerator versus an electric car — at the lowest cost.”
The report advocates against taking a regulatory approach, according to the Washington Post. “Regulations might not leave sufficient flexibility for households and firms to find least-cost options,” it says. Regulators might not foresee or support novel technologies, and intrusive rules “motivate firms to collude with officials to alter or evade the regulations.”
They also provide weak incentives for companies to invest in a wide range of better technology, because only the state’s favored approaches to decarbonizing the economy would be rewarded. For these reasons, regulatory and other alternative approaches cost society some 50 to 100% more than a carbon tax for the same environmental benefits. With adequate carbon fees, cities won’t have to ban automobiles. Drivers will do precisely what economic theory says they will do. They will chose the least cost option — electric cars.
The IMF says we need a carbon fee of at least $75 per ton in order to keep global heating from spiraling out of control. Its research finds the average cost of carbon worldwide today is a paltry $2 a ton. No wonder the environment is in such desperate trouble.
Won’t a carbon fee raise the cost of living? Yes, it absolutely will. Electricity prices can be expected to rise by an average of 70% and the price of a gallon of gasoline could go up by 15%. But the beauty of the plan is that most of the money collected will be returned to the people who will be most affected. In many cases, the rebates will exceed the cost increases by a significant margin.
The issue is similar to what new car buyers experience today. Many articles here on CleanTechnica point out that when we look at the total cost of ownership, electric cars are already a less expensive option than a conventional car, yet many new car shoppers have difficulty looking beyond the sticker price. Our brains are better at making instantaneous comparisons in real time than they are at calculating long term options.
The problem is, unless we address carbon pollution in a serious way now, there very well may be no tomorrow. Left to our own devices, most of us would choose to do nothing. A carbon fee arrangement would take the burden of saving the planet off our shoulders. It would make it part of our daily economic choices without Big Brother breathing down our necks. Even conservatives should like that.