The case for a carbon tax

After the 10:10 campaign accidentally hit the self-destruct button just a week before their big day, it is useful to remind people that greenhouse gas emission reduction is still a worthy goal, beyond collecting taxes.

This will soon appear in La Stampa:

Florence is said to have the best climate in the world. Surely, tourists from around the world flock to the northern shores of the Mediterranean, as do growing numbers of pensioners. That will change in the future as more northerly destinations will become more attractive and northern Italy may get too hot for the average Brit and German.

The impact on the Italian tourism industry is but one of the many effects of climate change. Some of these impacts are positive. Less energy will be needed to heat homes in winter. Crops will grow better as there is more carbon dioxide in the atmosphere. However, for most people, the impacts of climate change are, on balance, negative. This is surely the case in the longer term.

People often portray climate change as the greatest problem of the 21st century. Twenty years of economic research pooh-poohs the idea that there is an impending catastrophe. Poverty and air pollution kill more people per year that climate change will in a century. But that does not take away that climate change is a real problem that does real damage.

Climate change primarily affects poor people in faraway places. Poor people often live in hot places. They are more exposed to the weather. They cannot afford to protect themselves against the vagaries of the weather. This means that climate policy is not for our benefit, nor for the benefit of our children and grandchildren. Climate policy is primarily for the benefit of the children and grandchildren of people in distant countries. We have a moral obligation, however, to avoid harming others or to compensate them if we do.

We should also wonder what is in the best interest of future generations. Greenhouse gas emission reduction would slow the spread of malaria. A malaria vaccine would eradicate the disease. Climate change may cut food production in Africa by one-third. If African farmers would use the latest farming methods, food production would increase ten-fold. Climate policy should therefore not come at the expense of development policy. But it does: A growing share of development aid is spent on climate change. This should stop.

Some of the impacts of climate change are really impacts of poverty in disguise. If we leave these aside, there is still plenty to worry about climate change, including its impact on ice sheets. And there are many things that we do not know or understand. The effect on biodiversity is one such area. We know climate change will have widespread negative effects, but we do know how bad it will be. We know that the negative impacts of a gradual warming in the 21st century would be modest, but there has been no serious study of the impacts of more rapid warming or of the impacts in the very long term. If emissions continue unabated, climate change after 2100 could well be much more dramatic than anything foreseen for this century. Nor do we know much about the indirect effects of climate change. Tropical countries tend to grow slower than economies in the temperate zone. If climate is a contributing factor to the inability to develop, as some scholars suspect, then the impacts of climate change are much larger than current estimates suggest. But we simply do not know.

Everything about climate change is uncertain. Uncertainty is no reason not to act. In fact, it is the other way around. What we do know, suggests that climate change is a real problem. There is a small chance that current concerns are overblown. There is no reason to believe that climate change will make us all rich. But there is also a small chance that climate change will wreck the livelihood of many people. A relatively modest investment in greenhouse gas emission reduction would take away the worst risks. If the climate optimists are right, we would have made energy a bit more expensive for no reason. If the climate pessimists are right, we would have avoided a catastrophe. A rational person would err on the side of the pessimists.

There is another way of looking at the same problem. If we burn all fossil fuels that are still in the ground, Earth could get very hot. We cannot let the planet get warmer and warmer and warmer still. That must get us into real trouble sooner or later There is only one way to stop the carbon dioxide concentration in the atmosphere, and hence the temperature, from rising: Emissions have to go to zero. That is a daunting task. We will need a century to do this. You will not make it to the end of the journey if you do not start. We may decide to start slowly and cautiously, but a small start is better than no start at all.

Similarly, solving the problem of climate change will require the cooperation of all substantial countries on the planet. It is easy to wait for others to move, but that guarantees failure. A responsible country reduces its emissions, regardless of what others are doing. Perhaps one should not step too far ahead of one’s main trading partners, but lagging behind creates more long-term problems than short-term gains.

[Final paragraph removed, as it is about Italy’s lacking climate policy]

FDI in Ireland

Goerg, Hanley and Strobl write about FDI policy at Vox EU. Here’s the summary:

A chief concern for countries aiming to attract investment is how it will trickle down to the local economy. This column presents evidence on the effect of government grants to foreign companies investing in Ireland between 1983 and 2002. It finds that the grants had little effect on generating supply links with local firms and argues that governments should instead work towards reducing partner search costs.

Brian Lucey on the Bondholder Bailout

Brian Lucey writes on the bondholder bailout and other matters in today’s Irish Times: article here.

Death by a Thousand Cuts

Pat Kenny’s Frontline made for depressing watching last night.   The first segment focused on the level and composition of the fiscal adjustment for the next four years with an emphasis on next year.   Credit to Dan O’Brien and the others on the panel for being brave enough to be specific about where they would cut. 

But given the size of the needed adjustment, I worry that this formula of focusing on specific adjustments one-by-one is just not going to work.   For each proposed adjustment – means testing child benefit, cutting public–service pensions, introducing a property tax – the affected group will focus on the negative effect on them and will inevitably try to shift the burden. 

Recognising the size of the overall adjustment, I think it is better to start with a plan for the overall distribution of the burden across the income/wealth distribution.   The pain will need to be spread broadly but progressively.   After recent budgets, the ESRI has provided an excellent analysis of the distributional implications of tax and benefit adjustments using its SWITCH model.   This tool could be available prior to the budget to evaluate alternative four-year plans.   The key is to make people think about the overall effect on them in the context of how the overall burden is being shared.   My sense is that there is recognition a large adjustment must take place and most are willing to play their part — but only if assured that others are bearing their fair share.   The alternative of arguing about specific cuts in isolation of the overall distribution of the pain is probably doomed to failure. 

Child Benefit Payments Cut for UK High-Rate Taxpayers

The BBC report on the UK Chancellor’s decision to axe child benefits from top-rate taxpayers. Rates in Ireland are approximately 150 per child per month (but vary with family size) and are paid universally regardless of family income for each child aged under 16 or under 18 and in full-time education. Like any universal payment of this nature, there is the obvious question as to why people on higher incomes should be receiving a transfer payment from the state. A less obvious question is what we mean by higher incomes and where the threshold should be set. Expenditure on this scheme is approximately 2.3 billion euro in Ireland. Those arguing to keep the benefit as it stands might question why we will end up subsidising John Terry’s wages (see Karl’s post below) while cutting benefits from mothers and children. I am not sure I have an answer to that one either. If we do have to cut, then I would rather it be from people like me with above average salaries and for schemes like child benefit that don’t have an obvious reason to be universal rather than from well-targeted schemes.