https://www.economist.com/finance-and-economics/2022/03/26/have-economists-led-the-worlds-environmental-policies-astray

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Finance & economicsMar 26th 2022 edition

Free exchange
Have economists led the world's environmental policies astray?

A new book argues for a supercharged approach to net zero

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Mar 26th 2022

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IF THE WORLD economy fails to decarbonise, it will not be because of
the cost. The gross investment needed to achieve net-zero emissions
by 2050 can seem enormous: a cumulative $275trn, according to the
McKinsey Global Institute, a think-tank attached to the consultancy.
But over a period of decades the world would have had to replace its
cars, gas boilers and power plants anyway. So the additional spending
needed to go green is in fact much smaller: $25trn. Spread that over
many years and compare it to global GDP, and it looks significant but
manageable, peaking at 1.4% between 2026 and 2035. And that is
without counting the returns on the investment. British officials
reckon that three-quarters of the total cost of the transition to net
zero will be offset by benefits such as more efficient transport, and
that the state may need to spend only 0.4% of GDP a year over three
decades.

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The challenge of getting to net zero, therefore, is not primarily
budgetary but structural: how do you design politically viable
policies to ensure the transition actually happens? That is the
question Eric Lonergan, an economist and fund manager, and Corinne
Sawers, a climate consultant, take on in their new book "Supercharge
Me: Net Zero Faster".

The authors are not kind to economists, who typically want to put a
price on emissions and then let markets do the work. Economists have,
the authors allege, skipped a chapter in the textbooks. They have
focused on externalities, the damage done to society when carbon is
emitted. But they do not think about the elasticity of demand--the
extent to which prices change behaviour.

Carbon prices do not alter people's choices much when there are too
few substitutes for dirty goods, or when those substitutes are too
expensive. High fuel taxes, for example, tend to provoke a political
backlash against environmentalism--think of France's gilets jaunes--but
do not much alter transport emissions. Britain has had one of the
highest levels of fuel duty in the rich world in recent decades, note
Mr Lonergan and Ms Sawers, but drivers' take-up of electric vehicles
has been unremarkable.

The authors argue that getting people to make the big leaps needed to
decarbonise, such as buying an electric car or installing a domestic
heat pump, instead requires "extreme positive incentives for change"
(EPICs). They laud Norway for exempting electric vehicles from road
tax, cutting their parking charges in half and giving them access to
bus lanes. (More than 90% of cars sold in the country are now
electric.) They propose big mortgage discounts for homeowners who
retrofit their properties. And they want the state to generously
subsidise lending to green projects while exempting them from a range
of taxes. "To succeed we have to fight on all fronts," they write.

Their assault on carbon pricing is not entirely without merit. The
theoretical attraction of the policy is that it leads the market to
discover the cheapest ways to cut emissions, where behaviour is
easily changed, while allowing other parts of the economy to choose
to pay the toll. Economists in Barack Obama's White House were among
those who puzzled over the "social cost of carbon"--the optimal carbon
price that would deter some emissions, but not those that were
sufficiently beneficial to the economy to offset their effect on
global temperatures.

But in a world of fixed-date net-zero targets this sort of logic
loses power. Such goals concern all pollution, not just that which is
easily abated. Saying there is a maximum permissible amount of global
warming of 1.5-2degC above pre-industrial levels--the targets in the
Paris agreement--is like saying there is a point at which the social
cost of carbon is infinite. In this world policymakers are not
setting a carbon price to distinguish between emissions. They are
trying to change behaviour. It may be that EPICs or investments in
green technology are a more politically viable route to doing so than
raising the carbon price to whatever level is necessary to extinguish
inelastic demand for fossil fuels.

Yet the authors push their criticism of carbon prices too far. They
praise Britain's adoption of wind power, but fail to note the role
that its "carbon price floor", a minimum levy bolted on to the EU's
emissions-trading scheme, played in the transition. They lament the
"complexity" of carbon taxation, while also advocating a fiddly green
corporate tax. And they fail to notice the flawed political economy
of their kitchen-sink approach. For example, they call on central
banks to provide the green subsidies they desire. To whom would the
central bank be accountable? And once the principle that monetary
policy does not allocate capital is conceded, what is to stop other
demands being made on it? Carbon pricing is simple and transparent by
comparison.

Casting the net wide

Moreover, there is an important role for carbon pricing even in a
net-zero world. One area of technological possibility concerns the
removal of carbon dioxide from the atmosphere. The potential for
"direct air capture", or a well-governed market for carbon offsets
such as planting trees, restores the logic of using carbon prices to
discriminate between emissions as well as simply deterring them. If
such advances materialise, the carbon price might eventually be the
exact cost of extracting carbon from the atmosphere, with the market
determining the size of the gross flows on either side of the
net-zero ledger.

Even if Mr Lonergan and Ms Sawers are right that some EPICs are
needed to make the journey to net zero politically easier, then,
economists' long-standing arguments for carbon pricing still have
considerable merit. And the world has been slowly coming round: in
2021 more than 20% of greenhouse-gas emissions were covered by a
carbon-pricing scheme, up from about 5% a decade ago. The path to net
zero will involve more than set-it-and-forget-it carbon pricing. But
economists' favourite climate-change policy remains an essential one.
#

Read more from Free Exchange, our column on economics:

The disturbing new relevance of theories of nuclear deterrence (Mar
19th)
How oil shocks have become less shocking (Mar 12th)
Vladimir Putin's Fortress Russia is crumbling (Mar 5th)

For more expert analysis of the biggest stories in economics,
business and markets, sign up to Money Talks, our weekly newsletter.

This article appeared in the Finance & economics section of the print
edition under the headline "An EPIC challenge"

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