Have economists led the world’s

environmental policies astray?

A new book argues for a supercharged approach to net
zero Mar 26th 2022

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 1.5-2°C 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.