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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Young voters lost the referendum but they still deserve a future

It's time to stop sneering at "crap towns" and turn them into places young people want to stay. 

What a horror show. A land-slide 75 per cent of young people voted in favour of Europe. The greater numbers of the over 65s met that force with 61 per cent against. Possibly the greatest divide in our country turned out to be not gender, not race, not even party politics, but age. The old and the young faced off about how to run our country, and the young lost. 
 
What have we done to our future? Well, whatever happens now, leadership is required. We can’t afford to have the terms of the debate dictated by Brexiters who looked as shocked at the mess they have made as Stronger-Inners are distraught. We can’t afford to wallow either. Young people across this country today are feeling worried and let down – failed by all of us - because when their future was on the line, we were unable to secure it. We – those who believe we achieve more by our common endeavour - all feel that deep worry, and all share in that shame.

How we should all rue the choice not to allow 16 and 17 year olds to vote. And quickly re-ignite the campaign for votes at 16.

But young people don’t need our worry or our pity or our shame. They need a better chance and we need to give them one. I believe passionately that the future for this country was as a leader in Europe, but that does not mean we give up on our future now. For Labour, the challenge now is to work out how we can build a better future for all our people and communities. The sky has not fallen. The UK is still a rich country.

Beat recession with better housing

Let’s start with housing and development. It is no longer good enough to simply set targets with no possibility of meeting them. The housing crunch has killed off the chance of owning a home for many young people, and left thousands at the mercy of cripplingly expensive rent.  The housing market is broken and we need to build much faster in high growth areas like London and Manchester at the same time investing in restoring low quality housing in our northern towns, in Scotland, Wales and in Northern Ireland. 

In policy terms, we should be asking the Local Government Association, the Infrastructure Commission, and the construction industry itself, to collaborate on a counter-Brexit house building plan with a focus on areas where there is a clear market failure. We could get a champion of industry and construction such as my old Network Rail boss, Sir John Armitt, to be in charge, and lead a national mission to build and rebuild homes.

In the last parliament, Osborne first tried the "tighten our belts" approach to speeding up growth. He failed, and then tried plan B: investment for growth. Now we have the possibility of another recession on the cards and may well need to use investment to stop our economy grinding to a halt. Now - or possibly sooner - would be an excellent time for a national building project like this housing plan.

Stop sneering at "crap towns"

On economic development, it is clear that Labour needs a strategy for giving our northern towns an economic future and linking them up with the modern economy. When cities grow, and towns fall behind, those towns are a breeding ground for frustration. This is not just about cuts, it is about the uneven distribution of the benefits of globalisation. The Brexit vote was centred around areas that justifiably feel they have lost from the last decades. We need to make sure they win from the years ahead.

For far too long, there has been a sneering "crap towns" attitude. These places can offer good housing, community, and a decent life. But the problem there is work. In many of our towns, there is too little to do that can offer a young person a career tomorrow as well as a shift today.

Because, as it happens, the biggest driver of low pay tends to be skill level, not immigration. 

Teach the skills we need

Of course we should stop exploitation of migrant workers who undercut others. Let's tell firms that use exploitative agencies they can't work for the Government. But you can’t raise wages without changing the structure of the labour market. It’s not just about replacing one set of workers with another - you have to raise the level of wages that those workers can command. Because the truth about work in too many places is that most of the jobs available are either those with the low status of care work (though it may be highly-skilled work), or industries with a high volume of low-skilled work such as retail and hospitality. But from there, there’s nothing to move on to. The brain drain to cities has consequences.

Leaving Europe will shut off economic opportunity across the country to many young people.  Frankly, we owe it to them to work like demons to offer them something better closer to home.

We need a social partnership for skills and work. The Confederation of British Industry and the Trades Union Congress working together to deliver an urgent plan for training and career progression in the towns with stagnant labour markets and low skills. We need to find a way to stop the brain drain that sucks the talent out of the places that need it the most, using the experience of programmes like Teach First. When the best people feel they have no reason to return to where they grow up, it is both a sign of a deep problem and also demoralising evidence of decline for those left behind.

And our new metro-mayors must pay as much attention to the towns in their region as well as the city centre. No one left out, no one’s local shops lying empty whilst a city down the road flourishes. And no schools failing, either.

It is undeniable that people voted for change in the referendum. The problem is that the change they voted for will do little to solve the problems they face. Labour’s role is not just to point this out, but to offer a vision of real meaningful change. 

Not easy, perhaps. But one thing is for certain, mouthing platitudes about "hearing concerns"and offering only symbolic gestures has been tested to destruction. People deserve better and we need to offer it to them.

Alison McGovern is the Labour MP for Wirral South

Alison McGovern is Labour MP for Wirral South.