Global warming and externalities

How a carbon tax can "solve" global warming

Tim Worstall (yes, when he's not trolling he's quite good) has a piece up at the Telegraph explaining how carbon taxes work, and why they could "solve" global warming:

In economic theory, the problem here is that my actions that create emissions also damage someone else. But I don't have to pay for the damage I've caused. This is called an externality and the economists' solution is something called a Pigou Tax. That is, we add a tax equal to the damage I'm doing, so that I do pay for that damage.

Worstall cites the Stern Review's figure of $80 per tonne of CO2 as a good starting ground for where to set a carbon tax, and explains why it's the most efficient way to deal with climate change:

As a made-up example: my car emits one tonne CO2 when I drive it to buy fresh bread for lunch. That's $80 of damage I cause in the future by doing so. But the benefit to me is trivial: if you paid me 50p (alright, £5 in the rain) I'd cycle instead and not emit the CO2. The value to me of driving is that 50p; the costs to someone else are the $80. Clearly, this is a bad deal for everyone else: they're bearing costs much greater than the benefit to anyone at all. An $80 a tonne tax would get me cycling and that would be a good thing: I've stopped doing something where the benefit is lower than the cost.

However, we've a pregnant woman in pre-eclampsia. She needs to go to hospital in an ambulance which is going to emit that tonne, that $80 worth of CO2. Without it she and the child will be dead; with it they'll be fine. We usually value a statistical life in the £2 – 3 million range. That's what the railways will spend on safety to save a life on average. Or we could use the £50,000 that NICE applies to one year of good-quality life. If your drug treatment costs more than this, then you won't get it on the NHS; less and you might. Different numbers but much the same outcome: burn that fuel and damn the $80 of future damages, because they're much lower than the benefits that are achieved right now from burning that fuel.

This efficiency is why a carbon tax – or the harder to impose, but fairer and economically identical "cap-and-trade" system – really is the best way to deal with global warming. By definition, it deals with "bad" emissions while allowing "good" ones, and it does so far better than a legislature could ever hope to with a sprawling network of tariffs and subsidies.

But Worstall does somewhat overstate the case in one area, when he writes:

The other part [of a reader's question] – what's the point if we're not going to spend the money on green projects? – misunderstands the purpose of the tax. We're not trying to raise money: we're trying to change prices.

Changing prices is only half the effect of a carbon tax – or any Pigou tax. The other half is compensating the "victim" for their loss.

Suppose we live in a little two person economy where every tonne of CO2 you produce causes $80 worth of flooding damage to me. Imposing a carbon tax solves half the problem, in that it stops you polluting if you only get $10 benefit from it. But it doesn't solve what happens if you can make $100 from polluting.

In that case, you pay $80, and make $20 profit. I'm still left with $80 of flooding damage. The proper use of the money raised is to compensate the me for that loss. Otherwise, a tax which merely sorts out externalities becomes a revenue-raising tool of Government. In practice, this means that money raised from a carbon tax should be used on "green projects".

Which would annoy Worstall's fellow Telegraph blogger James Delingpole.

Anti-carbon tax protestors in Australia. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Supreme Court gives MPs a vote on Brexit – but who are the real winners?

The Supreme Court ruled that Parliament must have a say in starting the process of Brexit. But this may be a hollow victory for Labour. 

The Supreme Court has ruled by a majority of 8 to 3 that the government cannot trigger Article 50 without an Act of Parliament, as leaving the European Union represents a change of a source of UK law, and a loss of rights by UK citizens, which can only be authorised by the legislature, not the executive. (You can read the full judgement here).

But crucially, they have unanimously ruled that the devolved parliaments do not need to vote before the government triggers Article 50.

Which as far as Brexit is concerned, doesn't change very much. There is a comfortable majority to trigger Article 50 in both Houses of Parliament. It will highlight Labour's agonies over just how to navigate the Brexit vote and to keep its coalition together, but as long as Brexit is top of the agenda, that will be the case.

And don't think that Brexit will vanish any time soon. As one senior Liberal Democrat pointed out, "it took Greenland three years to leave - and all they had to talk about was fish". We will be disentangling ourselves from the European Union for years, and very possibly for decades. Labour's Brexit problem has a long  way yet to run.

While the devolved legislatures in Scotland, Northern Ireland and Wales will not be able to stop or delay Brexit, that their rights have been unanimously ruled against will be a boon to Sinn Féin in the elections in March, and a longterm asset to the SNP as well. The most important part of all this: that the ruling will be seen in some parts of Northern Ireland as an unpicking of the Good Friday Agreement. That issue hasn't gone away, you know. 

But it's Theresa May who today's judgement really tells you something about. She could very easily have shrugged off the High Court's judgement as one of those things and passed Article 50 through the Houses of Parliament by now. (Not least because the High Court judgement didn't weaken the powers of the executive or require the devolved legislatures, both of which she risked by carrying on the fight.)

If you take one thing from that, take this: the narrative that the PM is indecisive or cautious has more than a few holes in it. Just ask George Osborne, Michael Gove, Nicky Morgan and Ed Vaizey: most party leaders would have refrained from purging an entire faction overnight, but not May.

Far from being risk-averse, the PM is prone to a fight. And in this case, she's merely suffered delay, rather than disaster. But it may be that far from being undone by caution, it will be her hotblooded streak that brings about the end of Theresa May.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.