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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The Brexit elite want to make trade great again – but there’s a catch

The most likely trade partners will want something in return. And it could be awkward. 

Make trade great again! That's an often overlooked priority of Britain's Brexit elite, who believe that by freeing the United Kingdom from the desiccated hand of the European bureaucracy they can strike trade deals with the rest of the world.

That's why Liam Fox, the Trade Secretary, is feeling particularly proud of himself this morning, and has written an article for the Telegraph about all the deals that he is doing the preparatory work for. "Britain embarks on trade crusade" is that paper's splash.

The informal talks involve Norway, New Zealand, and the Gulf Cooperation Council, a political and economic alliance of Middle Eastern countries, including Kuwait, the UAE and our friends the Saudis.

Elsewhere, much symbolic importance has been added to a quick deal with the United States, with Theresa May saying that we were "front of the queue" with President-Elect Donald Trump in her speech this week. 

As far as Trump is concerned, the incoming administration seems to see it differently: Wilbur Ross, his Commerce Secretary, yesterday told Congress that the first priority is to re-negotiate the Nafta deal with their nearest neighbours, Canada and Mexico.

In terms of judging whether or not Brexit is a success or not, let's be clear: if the metric for success is striking a trade deal with a Trump administration that believes that every trade deal the United States has struck has been too good on the other party to the deal, Brexit will be a failure.

There is much more potential for a genuine post-Brexit deal with the other nations of the English-speaking world. But there's something to watch here, too: there is plenty of scope for trade deals with the emerging powers in the Brics - Brazil, India, etc. etc.

But what there isn't is scope for a deal that won't involve the handing out of many more visas to those countries, particularly India, than we do currently.

Downing Street sees the success of Brexit on hinging on trade and immigration. But political success on the latter may hobble any hope of making a decent go of the former. 

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