Have economists misled the world’s environmental policy?

IF The World If the economy fails to decarbonize, it will not be because of costs. The gross investment required to achieve net-zero emissions by 2050 may seem huge: a growing $ 275trn, a think tank affiliated with the consultant, according to the McKinsey Global Institute. But for decades the world has had to replace cars, gas boilers and power plants anyway. So the extra cost to be green is actually much lower: $ 25trn. Spread over many years and compare it worldwide GDP, And it looks significant but manageable, topping 1.4% between 2026 and 2035. And this is without calculating the return on investment. British officials believe that three-quarters of the total cost of converting to net zero will be offset by facilities such as more efficient transportation and the state may have to spend only 0.4%. GDP One year for three decades.

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The challenge of rising to net zero, therefore, is not primarily budgetary but structural: how do you design politically effective policies to ensure that the transformation takes place? Economist and fund manager Eric Lonergan and climate consultant Corinne Sawers raise this question in their new book, “Supercharge Mr. Net Zero Faster.”

The authors are not kind to economists, who usually want to pay the price of emissions and then let the market work. Economists, the authors complain, have skipped a chapter in the textbook. They have focused on the externalities, the harms of carbon emissions. But they don’t think about the elasticity of demand – how much price changes behavior.

When there are very few alternatives to dirty products, or when those alternatives are very expensive, carbon prices do not change people’s preferences very much. High fuel taxes, for example, provoke a political reaction against environmentalism – think of France Yellow vestিনBut don’t change transport emissions too much. Britain has had one of the highest levels of fuel tariffs in the rich world in recent decades, Mr Lonergan and Miss Sawers noted, but the adoption of electric vehicles by drivers was unparalleled.

The authors argue that people need “extreme positive incentives for change” rather than the big jump needed to decarbonize, such as buying an electric car or installing a domestic heat pump.EPICs). They praised Norway for exempting electric vehicles from road taxes, halving their parking charges and giving them access to bus lanes. (More than 90% of cars sold in the country are now electric.) They offer big mortgage discounts for homeowners who have recovered their property. And they want the state to generously subsidize lending to green projects and exempt them from various taxes. “To be successful we must fight on all fronts,” they wrote.

Their attack on carbon prices is not entirely without merit. The theoretical attraction of the policy is that it leads the market to discover the cheapest ways to reduce emissions, where behavior changes easily, allowing other parts of the economy to choose to pay tolls. Barack Obama’s White House economists were among those who were confused about the “social cost of carbon” – the best carbon price that would prevent some emissions, but not beneficial enough for the economy to offset their effects on global warming.

But in the world of fixed-date net-zero targets this kind of reasoning loses strength. Such targets concern all pollution, not just those that are easily reduced. 1.5-2 degrees Celsius above the pre-industrial level is the allowable amount of maximum global warming – the goals of the Paris Agreement – there is a point to say where the social cost of carbon is infinite. In this world, policymakers are not pricing carbon to differentiate emissions. They are trying to change behavior. It could be EPICInvesting in green technology is a politically viable way to meet the volatile demand for fossil fuels, rather than raising the price of carbon.

Yet the authors pushed their criticism of carbon prices far beyond that. They praise Britain’s adoption of wind power, but fail to notice its “carbon footprint”, the role that a minimum tariff imposes. IIts issuance-trading scheme, has been played in transition. They lament the “complexity” of the carbon tax, as well as the need for a stable green corporate tax. And they fail to notice the flawed political economy of their kitchen-sink system. For example, they called on central banks to provide green subsidies of their choice. To whom will the central bank be accountable? And once the policy of non-allocation of capital is accepted in monetary policy, what is there to stop making other demands on it? Simple and transparent by comparing carbon prices.

Net wide casting

Moreover, the net-zero world also has an important role to play in determining the price of carbon. One area of ​​technological potential is the concern for the removal of carbon dioxide from the atmosphere. The possibility of a well-governed market for “direct air capture” or carbon offsets, such as planting trees, uses carbon prices to discriminate emissions as well as simply restore the rationale for preventing them. If such advances are implemented, the cost of carbon could ultimately be the exact cost of carbon emissions from the atmosphere, determining the size of the gross flow on both sides of the market net-zero laser.

Even if some of Mr. Lonergan and Ms Sawers are right EPICPolitically needed to facilitate the journey to net zero, then, the long-standing argument of economists for carbon prices still has considerable merit. And the world is slowly coming to a close: in 2021, more than 20% of greenhouse gas emissions were covered by carbon-pricing schemes, up from about 5% a decade ago. The path to net zero involves more than just setting the carbon price on and forgetting. But economists’ favorite climate change policy remains an essential one. 3

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This article is published in the Finance and Economics section of the print edition under the title “An EPIC Challenge”

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