Matthew Sinclair: The three elements of good climate policy

Matthew Sinclair is Director of The TaxPayers' Alliance.

I think Roger Scruton is absolutely right both in his book – Green Philosophy – and his article for this website about the motive that can cause people to protect their environment: it is oikophilia; love of the common home that we share with those dead and those who have yet to be born. You can see that motive at work when beautiful creatures, landscapes and buildings are threatened. No commandment from a politician or bureaucrat is needed to encourage people to rally to their defence.

Unfortunately, oikophilia has its limits. It works well when the environmental good at stake is something you can see, hear, taste or touch. It motivates what Peter Huber called – in his book Hard Green – hard greens, not soft greens who are more concerned about concentrations of carbon dioxide in the atmosphere and similarly intangible problems. No one feels in their bones that an extra tonne of carbon dioxide in the air is an attack on the integrity of their home. They need to be told that it is even there.

Whatever the latest laughable analysis from the Department of Energy and Climate Change says, cutting greenhouse gas emissions is expensive. Economic growth has been associated with increasing carbon dioxide emissions since the Industrial Revolution. The 19th Century French economist Emile Levasseur wrote about how, if one steam horsepower was taken as equivalent to twenty-one men, in 1840 French industry had a million new workers as a result of steam power. By 1885–87 that number had risen to 98 million, or “deux esclaves et demi par habitant de la France” (two and a half “slaves” for each inhabitant of France).

Our final energy consumption in 2009 was equivalent to the labour of 97 men working tirelessly to serve each Briton. If we use more expensive sources of energy in order to reduce greenhouse gas emissions that means paying them more. The Japanese economist Yoichi Kaya described the result in what is now known as the Kaya Identity: Emissions = Population x Income per capita x Energy intensity of income x Carbon intensity of energy.

Free market economies tend to use and generate energy more efficiently over time but, short of a technological revolution, the draconian limits on emissions that politicians have enshrined in law can only be met with a substantial contraction in national income. The public don’t want to pay that price, which is why climate policy has tended to proceed by the least democratic route possible.
And they are right. William Nordhaus, Sterling Professor of Economics at Yale, is probably the closest anyone comes to the centre of the climate policy debate. Using the 2007 version of his model he estimated that the course of action recommended in the Stern Review would reduce climate harms by $14 trillion but at a cost of nearly $28 trillion. The kind of radical action that politicians have committed us to here doesn’t pass the cost-benefit test.

Nordhaus has found that the “optimal” path – a mild and escalating carbon tax – leaves us 0.35 per cent better off than in a base case where no climate change policies are adopted, using the more recent 2010 version of his model. But economists can always find marginal gains like that on a blackboard. It assumes a truly heroic global agreement, with every country selflessly and efficiently doing their bit. That is not happening.

We are instead pressing ahead unilaterally with terrible policies: draining the budgets of families and businesses with excessive green taxes; picking losers by giving the most generous subsidies to the most expensive sources of low carbon energy; and recreating the volatility of the housing market with an emissions trading scheme where the supply of allowances is fixed, so fluctuations in demand lead to wild swings in the price.

On top of all that we now have the carbon floor price, which is nothing more than an act of industrial masochism. It hurts British industry and, by depressing market demand for emissions allowances and thereby reducing prices in other countries, helps its competitors in other European countries.

Some think that the answer is to replace all that with a nice, neat carbon tax. Pigovian taxation looks great on the economist’s blackboard but will never survive contact with reality. Politicians don’t have the information or the incentives to set the right taxes for negative externalities and subsidies for positive externalities. It quickly degenerates into just another excuse to feed the habits of countless subsidy junkies and impose higher taxes on the rest of us.

British climate policy has, for far too long, been based on trying to answer the question “if a global government set climate policy, what would it tell us to do?”

We are investing enormous resources in cutting what amounts to well under two per cent of global emissions. And higher energy prices here are as likely to export emissions as to eliminate them. If we instead ask “how can Britain, a country producing modest emissions itself but with considerable financial and technical resources, make it easier to cut global emissions?”

I think the answer is then obvious. Staking enormous resources on installing phenomenal amounts of offshore wind capacity in the hope that will drive down costs to an economic level is madness. Instead of investing hundreds of billions to meet environmental targets with the technology available today, we should invest hundreds of millions in putting British scientists and engineers to work developing better alternatives. Prizes are the best way of deploying the money and have been used to steer technological development in useful directions since the Industrial Revolution.
Good climate policy has three elements: resilience, as free and prosperous societies will cope best with whatever the natural world throws at them; adaptation, as climate will always change and we will need to roll with the punches; and promoting research and development which can lower the price of cutting emissions.

All that fits within the established role of government. It does not require a utopian faith in supranational institutions. It will survive a lot of mistakes as each grant or prize doesn’t need to be worth billions so the stakes are relatively low on each roll of the dice. I would submit that it is both the right climate policy and definitely the right climate policy for an oikophile conservative.

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