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.

Photo: Getty
Show Hide image

Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

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