The case for a carbon dividend in two charts

A carbon dividend takes the revenue from auctions of emissions units for the ETS and gives it back to households. This year, the sale of emissions units will raise around $1.3 billion.* That is around $750 per household.

The following two charts show a) low-income households spend more of their incomes on carbon than other households, but b) have a smaller carbon footprint.

Source: Figure 4.3, Report 2.

Source: Figure 4.2, Report 2.

The charts come from a UK analysis by the London School of Economics. I know of no equivalent analysis for New Zealand, although these findings from Infometrics appear consistent.

So what does this mean?

Carbon pricing is generally thought to be regressive because low-income households spend a higher share of their incomes on goods and services which produce or lead to emissions.

However, a carbon dividend reverses this, making carbon pricing progressive. Giving households the revenues from the sale of emissions units disproportionately benefits low-income households. This is because their absolute carbon footprint is smaller than other households, meaning less exposure to the carbon tax, but dividends are paid on (something like) a flat rate.

Studies find different carbon dividends are progressive under most allocation rules, including a simple flat payment per person. Here is a list of studies on the equity effects of carbon dividends.

Studies also find that carbon dividends mean carbon pricing overall is a net benefit for a majority of households. The mid-range estimate seems to be around 60% of households. Low-income households benefit the most from a dividend: one of the studies, from the US, estimates 84% of low-decile households would receive a net benefit from carbon pricing after a dividend payment.

So if you are worried about protecting the most vulnerable households from the costs of lowering emissions – and many who work on climate change say they do – then a carbon dividend should be attractive to you.

On the other hand, if you are concerned about whether it will be possible set a carbon price that is high enough to achieve emissions targets without compromising popular support, then a carbon dividend should be attractive to you. A carbon dividend allows governments to go faster and harder on raising the carbon price, since payments back to households are shelter from higher power bills and petrol prices that necessarily follow from pricing carbon. The fact that dividend means most households win from carbon pricing, with the largest proportionate benefits going to those on low incomes, should increase voters’ tolerance for aggressive efforts to lower emissions.

So, a carbon dividend ticks a lot of boxes.

Naturally, the government has all-but ruled out a dividend. One the few concrete new policies in last week’s Emissions Reduction Plan was to dismiss the dividend idea. Here is what the government said (pp. 34-35):

Given the breadth, scale and duration of the transition to low-emissions economy, we need to ensure adequate, durable and certain public funding for climate action. The Treasury and the Ministry for the Environment are currently considering how the public finance system can provide this, including:

4. how we can recycle revenue from the New Zealand Emissions Trading Scheme (NZ ETS) into climate spending.

I understand James Shaw has subsequently confirmed no dividend.

Next time you hear Shaw or the PM or any other minister talking about a “climate crisis” or “climate justice,” keep in mind that they have ruled out about the closest thing you can find to a magic bullet in climate change policy. The one thing, other than a carbon price, that could do more to cut emissions and protect the most vulnerable, simply and easily, than anything else.

That’s what they rule out first.

* Excluding revenue from the sale of 1.6 million “backed” units. These are additional units, issued and sold at the auction on 1 September to defend the ETS price cap. Backed units have to be offset by the government in some way such that they do not raise global emissions.

Not about emissions

With its Emissions Reduction Plan released last week, the government is promising unprecedented control over every aspect of your life.

How you move. What you eat. Where you live. How you heat your home.

It is little short of a revolution. Between its emissions plan and next year’s Budget, which will also be about climate change, future governments of this country will have more to say about everything.

The problem is that existing policies already have this country firmly on track to deliver emissions targets.

In both its draft and final reports, the Climate Change Commission said current policies and a $50 carbon price will be enough to deliver net zero emissions in 2050. Its analysis did not show undue reliance on removals by exotic trees, although Ministers and officials have repeatedly made misleading statements about the Commission’s findings.

Today’s carbon price is $65. So we are ahead of schedule.

Which makes the government’s Emissions Reduction Plan redundant. We get to our targets without the Plan. Emissions will come down about as quickly with the plan as without.

New Zealand should get more credit for its progress on emissions. On a per-capita basis, greenhouse gases have been falling since 2006. They are down 22% overall, and down 34% if agriculture is excluded.

Net emissions of long-lived greenhouse gases – relevant for the net zero target – are down 25% per person.

And it is not pine trees that are doing all the work. More than 100% of the fall in net emissions is due to lower gross emissions.

So current policies are already doing the business demanded by environmentalists. There is no need to add thousands of dollars to the cost of vehicle imports, or any of the many other impositions being looked at, since we are already on track to deliver the stated goal.

There should be no question existing policies will deliver all of our emissions targets if they are given the chance. That is because, apart from methane, New Zealand has set net emissions targets. Both domestic law and international agreements recognise three pathways to lower net emissions: lower gross emissions; removals by trees and other carbon capture technologies; and offshore mitigation.

Removals and offshore mitigation are each affordable and scalable enough on their own to deliver net zero emissions in 2050.

But voters prefer reductions. Fine.

So the task for emissions policies is to assemble a mix of reductions, removals and offshore mitigation which

  • delivers emissions targets; and
  • reflects the premium voters are willing to pay for more reductions, less removals and less offshore mitigation.

The government is not thinking about climate change this way. In fact, it does not seem to be thinking about emissions at all. It has published an Emissions Reduction Plan which will bring down emissions by about the same amount as existing policies to achieve the same emissions targets.

What, then, is the point of an Emissions Reduction Plan if it does not reduce emissions?

Judging from its effects, the point is control. The plan will have two clear effects. Ministers will decide how and where emissions come down, not you. Second, you will pay more – ten times more, on the government’s own analysis – for the benefit of their judgment.

What a terrible deal. For the environment. And for your back pocket.

And all based on the twin lies that reducing emissions requires central control, and that the government’s Emissions Reduction Plan reduces emissions.

A climate policy framework

John Cochrane has written a long essay in National Review called ‘Climate Policy Should Pay More Attention to Climate Economics’ with a subtitle of ‘Without numbers, we will follow fashion.’

The article is beautifully written, hardly a single one of the 3,500 words is wasted. In arguing for economics in climate policy, Cochrane covers many of the major ideas for thinking about how to reduce emissions. The article is comprehensive enough to be a framework.

In this post, I attempt to distil the main ideas in Cochrane’s article.

To avoid doubt, Cochrane (and I) believe climate change is real and is a problem which justifies a policy response. He disputes none of the climate science. He takes the findings from science as given and thinks about the consequences for climate policies. He highlights the harmful mismatch between scientific findings and popular rhetoric on climate.

Most of the following text is directly from Cochrane, with or without quotes. I have put my favourite soundbites in italics:

Climate science and climate policy are different. Climate science concerns the relationship between greenhouse gas emissions and climate. Climate policy is about reducing greenhouse gas emissions. Attacking policy is not attacking the science. “You don’t have to argue with one line of the IPCC scientific reports to disagree with climate policy that doesn’t make economic sense.”

Climate change is not that expensive. “The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100… Five percent of GDP is only two to three years of lost growth. Climate change means that in 2100, absent climate policy or much adaptation, we will live at what 2097 levels would be if climate change were to magically disappear. We will be only 380 percent better off [instead of 400%]. Or maybe only 950 percent better off [instead of 1,000%]… Northern Europe has per capita GDP about 40 percent lower than that of the U.S., eight times or more the potential damage of climate change. Europe is a nice place to live.”

The central uncomfortable fact is that the output of an advanced industrial economy like the U.S., moving headlong into services, is just not that sensitive to climate or weather. The worst heat waves, floods, and storms just do not move national GDP.

To be clear, a modest cost is no reason not to act on climate. But a modest cost places a modest cap on the benefits of emissions policies, so caution is necessary to avoid emissions policies doing more harm than good.

Growth risk is an order of magnitude larger than climate risk. “The cost of climate change to India is trivial compared with the benefits India could obtain by adopting economic institutions more like those of the U.S. — which themselves are far from perfect.”

If the question is, “What steps can we take, perhaps costly today, to improve GDP in the year 2100?” hurried decarbonization is not the answer. If the question is, “What steps can we take to improve the well-being of the world’s poor?” climate policy is not the answer, with many zeros before you get to the decimal point. Sturdy pro-growth policies, however unpopular to so many in today’s political class and incumbent businesses and labor organizations, are the answer.

GDP is imperfect, but if anything it understates the benefits of economic progress. “It leaves out a lot — the tremendous value of free or nearly free goods, the value of clean air and water, good health, long life, a free and egalitarian society, and so forth. But all of these things are better when GDP is better, and far worse where GDP is worse.”

If the question is how to blunt the economic impact of climate change, adaptation has to be a major part of the answer. There seems to be a great disdain for adaptation, clearing the brush, building dikes and dams, moving to higher land, installing air conditioners, moving or engineering crops and so forth. Spread over a hundred years, the costs of adaptation are not large. Perhaps climate-policy advocates dismiss talk of adaptation because, by reducing the damage that might be caused by greenhouse-gas emissions, it makes emissions less scary. Climate models are also short on adaptation and innovation, perhaps for the same reason.

Miami might be six feet underwater in 2100, but Amsterdam has been six feet underwater for centuries. They built dikes. By hand. Amsterdam is a very nice place, not a poster for dystopian end of civilization. Buildings decay and need to be rebuilt every 50 years or so. Just start building in drier places.

We need rigour in climate policy. “For a small donation, pictures of cuddly animals might do. For trillion-dollar costs and regulations, they do not. To justify such costs, we need some dollar value on specific environmental damage of climate change. Yes, the numbers are uncertain. But those numbers are the only sensible framework to discuss spending trillions of dollars on climate now.”

Cost-benefit analysis matters for making the best use of limited resources. “Naming costs and benefits is particularly useful to analyze whether some of those trillions are not better spent on other environmental issues. For example, species extinction is a real problem. We are in the middle of a mass extinction. But the elephants will die from lack of land and poaching long before they get too hot or dry. For a trillion dollars, how much land could we buy and turn over to complete wilderness? How many more species would we save that way, rather than spending similar amounts of money on high-speed trains and hurrying the adoption of electric cars? The oceans are in trouble. For a trillion dollars, how much over-fishing, chemical pollution, plastic garbage, or noise could we fix? Economics is about choice, and about budget constraints.

Even though we don’t really know the economic or environmental cost of carbon, cost–benefit analysis is vital so that we do whatever we do efficiently. Avoid doing incredibly expensive things that save little carbon, and don’t ignore unfashionable things that might save a lot of carbon at lesser cost.

Without numbers, we will follow fashion. Today it’s windmills, solar panels, and electric cars. Yesterday it was high-speed trains. The day before it was corn ethanol and switchgrass. Actually addressing climate change in a sensible and effective way is likely to involve unfashionable technologies, and new technologies without political backers. A focus on cost–benefit, carbon per dollar, is vital to allow different technologies to compete, and new technologies to emerge. The alternative — and current predilection — is for different technologies to compete for political favor, a mechanism we all know well, along with its disastrous results, especially regarding innovation and cost reduction.

[MB: This is an important point. One of the costs of an ad hoc winner picking approach on climate is lower innovation. Subsidising EVs, for example, must reduce incentives for R&D in politically-disfavoured rival technologies, including technologies we do not yet know about.]

The policy prescription is simple: price + carbon dividend + R&D. “From an economic perspective, the ideal policy combines a carbon tax, whose revenues reduce other marginal tax rates, with strong support for basic R&D.”

Thus, if the question is how to reduce carbon as much as possible while damaging the economy as little as possible, an evenly applied carbon tax — even to the coal emissions used to create solar panels and car batteries — is the answer, in place of regulation and subsidies.

A carbon tax bakes in cost–benefit analysis, and otherwise incalculable carbon-reduction pledges. Just buy the cheapest option and you’re doing your bit.

Maybe rather than buying a Tesla, you should move closer to work — or carpool. Maybe cutting out one international trip does more than buying the Tesla. Maybe zoning and permitting reform will allow building houses so people don’t commute in the first place. Is it easier to decarbonize transport, home heating, cement, steel, or agriculture? Only by setting a price can we know the answers, and incent the millions of little daily decisions that go in to reducing carbon emissions efficiently.

A weak consumer response to a carbon tax argues for a carbon tax. “A carbon tax is a win-win. Many climate advocates disparage the carbon tax, on the view that people will not reduce energy consumption and carbon emissions when the price goes up. If so, great! A bankrupt government can raise a lot of money, and reduce other heavily damaging taxes. If people drastically reduce carbon emissions to avoid a small tax, the government doesn’t earn much money. Great! We save the planet at low cost.”

Carbon policy is full of economic fallacies. Mother Earth does not care if solar panels are made in the U.S. or China. She just wants them to be cheap. “Millions of green jobs” are a cost, not a benefit. Financial regulators are now taking on climate change, justifying this dramatic expansion beyond their legal authority by endlessly repeating a fantasy that “climate risk” imperils the financial system in the near future.

There is nothing in the science that justifies uniting “climate” with a left-wing political agenda. Yet even the IPCC mixes climate change with “sustainable development, poverty eradication and reducing inequalities.” Mixing anti-capitalist politics with climate change makes those skeptical of the rest of the agenda wonder about the objectivity of climate science, and whether the planet really is in such danger.

There is nothing in climate science to justify apocalyptic rhetoric. If the question is, “What threatens the collapse of civilization,” war, nuclear war, civil war, pandemic, crop pandemic, and social and political disintegration are far higher on the list. No healthy society fell apart over a slow and predictable change that came over a hundred years. There is nothing in climate science to say life on earth is threatened.

Climate advocates have done themselves and the planet a great disservice by wrapping climate policy in increasingly shrill, apocalyptic, partisan, and unscientific rhetoric. “Global warming” became “climate change,” reflecting in part effects on rainfall or different geographies, but also inviting media commentary on every weather event to become a sermon. In the Green New Deal and comparable movements, it became “climate justice,” wrapping climate inexorably in a far-left-wing politics of anti-capitalism. The required vocabulary moved on to “climate crisis.” Still not enough: In April the (formerly) Scientific American proclaimed that, in coordination “with major news outlets worldwide,” it would start using the term “climate emergency.” Will “climate catastrophe” be next?

Finally, here is what I think is Cochrane’s most important point:

Actually doing something about the climate will require decades of consistent policy. That will not happen by today’s elites crying wolf and cramming regulations down the throats of a disdained and temporarily distracted electorate. [MB: That will also not happen by seat-of-the-pants ad hoc policies, nor will name-and-shame work. Consistent policy means a system – consistent, clear, enduring rules to lower emissions. The ETS is a fine example of a rules-based approach. Policies like 100% renewable electricity are not.]

The ETS is extraordinary

Just a reminder of what an extraordinary achievement the New Zealand Emissions Trading Scheme (ETS) is. Introduced in 2008, the ETS covers around 96% of GDP. Apart from the carve-out of agriculture, the ETS has no domestic exceptions. Many offshore schemes exclude small businesses, and/or transport. Ours does not, making it probably the most comprehensive carbon price in the world. Agriculture, our main export earner, is on track to introduce some form of carbon price from 2025.

Look at how different things are in the United States, even under a Democratic White House. From John Cochrane:

[C]arbon taxes are right now a political nonstarter. You can see this most clearly in the hilarious plea from the White House for OPEC to increase production in order to keep gas prices down. This from the same administration that canceled Keystone, “suspended” the issue of new oil and gas leases on federal lands, and is spearheading a “whole of government” move to rapid elimination of fossil fuels before alternatives are in place, all of which must raise the price of gas. What’s going on? Well, clearly, governments find they must take underhanded, obscure regulatory steps to drive up the price of gas, with plausible deniability, rather than enact simple, transparent, much more effective and much less costly carbon taxes, which voters will notice.

The fact that we have an ETS which is comprehensive and puts a hefty $60 per tonne price on carbon, while remaining feasible, is exceptional.

Why not subsidise more EVs, Minister?

This morning’s Emissions Trading Scheme (ETS) auction resulted in a clearing price of $53.85, breaching the $50 price cap.

The government issued an additional 1.6 million ETS emissions units from a reserve to defend the cap.* These extra units will raise New Zealand’s emissions by 1.6 million tonnes. The law requires the extra units to be backed, or offset, so that they do not raise emissions overall. A sound mechanism.

As James Shaw said in a statement:

The Government is committed to balancing out the additional units released today to ensure there is no overall impact on emissions released into the atmosphere.

Great. Shaw went on to say how the extra units could be neutralised:

Officials are currently looking into the best way to achieve this, including by changing the volume of units available to purchase at future auctions.

Excellent. Issuing 1.6 million fewer emissions units in the future will indeed neutralise the extra units issued today.

Another way to neutralise the extra units are actions (reductions and/or removals) which are outside the ETS. For example, buying and shredding EU ETS units, or planting trees provided those trees are excluded from the ETS now and forever.

But what about, say, more EV subsidies to neutralise the extra units? If not, why not, Minister?

The answer, of course, is that EV subsidies will not – cannot – neutralise the extra units issued today because EVs are already in the ETS.

You can subsidise EVs until you are blue in the face. But that will not change the fact there are 1.6 million more emissions units in circulation which means 1.6 million tonnes’ more emissions from the areas of the economy covered by the ETS (which is nearly all of it).

No action which is covered by the ETS cap can neutralise the extra 1.6 million tonnes of emissions unless it changes the number of units in circulation. Why? Because the action – more EVs, for example – will simply free up emissions units for someone else to use. There will still be 1.6 million more units in circulation which means 1.6 million tonnes more emissions.

Which is exactly why EV subsidies and pretty much every other government emissions policy are a waste of time and money: virtually all of it is already in the ETS. EV subsidies can’t neutralise the extra units issued today for the same reason they have no effect on overall emissions: they are covered by the ETS cap, the cap is binding, so total emissions are determined solely by the cap (for the parts of the economy covered by the ETS).

Shaw is right (I hope) to rule out using more EV subsidies and similar policies to neutralise today’s extra emissions units. That would be futile. It’s just that this logic should rule out doing EV subsidies and policies like it at all. Those policies cannot neutralise today’s extra units because they do not lower overall emissions.

* Actually the government issued 7 million units to defend the cap, but 5.4 million were already budgeted and therefore did not raise emissions.

Keep climate policy focused on the social cost of carbon

A new paper in the journal Climate Policy says “Keep climate policy focused on the social cost of carbon”. Its abstract:

In the context of climate change, the application of cost-benefit analysis to inform mitigation policies can help to achieve the best outcomes and avoid the worst: spending trillions of dollars but failing to get the job done.

The job, of course, is to cut emissions.

The costs of a climate policy are the abatement costs of reducing emissions of carbon dioxide (CO2) (or other greenhouse gases). The standard measure of the benefits of a climate policy is the social cost of carbon (SCC), which measures the avoided economic damages associated with a metric ton of CO2 emissions. Recently, however, there have been calls for an alternative approach to policy evaluation that ignores the benefits of avoided climate damages and instead focuses only on minimizing the compliance costs of a given, politically determined climate objective. We argue here that a shift from use of the SCC and cost-benefit analysis to an alternative approach for evaluating policy that focuses on costs alone would be misguided. Rather than advocate for alternative approaches, now is the time to support efforts to update the SCC and its application to official climate policy evaluation.[emphasis added]

I note the Climate Change Commission used neither the social cost of carbon, nor cost-benefit analysis, nor costs alone to inform each of its recommendations to the government in its final report.

Perhaps the authors of the Climate Policy paper could write a follow up piece called “At least do something, for goodness sake” and send a copy to the Commission.

Numpties

Let’s Get Wellington Moving wants to spend $350 million to reduce emissions by 1,000 tonnes. That is a bad deal – for you, the environment, just about everyone except Let’s Get Wellington Moving, it seems. Here is part of the summary of a plan called “City Streets”:

Let’s pretend for a moment that the government had not capped emissions with the Emissions Trading Scheme last year. Let’s ignore the statutory cap on emissions.

At a discount rate of 6%, Treasury’s standard rate for public spending, $350 million has an annual cost of $21 million. Which means Let’s Get Wellington Moving is proposing to spend $21,000 per tonne of emissions avoided.

Spending that much on each tonne means the country goes bankrupt before we get to net zero. At $21,000 per tonne, net zero emissions costs 230% of GDP.

Of course, we have an ETS, domestic transport is in the ETS cap, and the ETS cap is the law. As a result, LGWM will reduce emissions by exactly zero tonnes. You’re not helping your grandchildren by borrowing to pay for emissions policies that don’t cut emissions. You’re just saddling them with debt and making them poorer.

Notwithstanding the whole not cutting emissions thing, congratulations LGWM. You’re in the hall of fame:

Let’s Get Wellington Moving IBD, August 2021, $21,000/tonne

EECA Low emissions contestable fund, December 2020, $33,000/tonne

Auckland Harbour walkway and cycleway, June 2021, $7,800-$230,000/tonne

Time to get real about emissions

It is nice to see others point out the consequences of an emissions cap. Thomas Lumley gets the logic of an ETS:

We’ve got a cap (more or less). One of the non-intuitive aspects of having a cap rather than a fixed price is that parallel efforts to reduce carbon emission don’t work the way you’d expect them to. If I replace my gas stove with an electric one, my kitchen will emit less carbon (modulo the impacts of making the new equipment).  If everyone did it, everyone’s kitchen would emit less carbon (again, ignoring the impacts of making the new equipment).  What would happen to NZ’s total carbon emissions? Nothing. We have a cap.  Less of the cap would go on carbon coupons for burning natural gas; more of it would be available for cars or trucks or coal-fired power stations.  The impact of our kitchen-renovation decisions would be cheaper emissions rights for other polluters, not lower emissions.

Well said, Thomas.

A commenter on Thomas’s post has some fairly standard objections to the argument:

First, the ETS was thoroughly undermined by the previous govt because the carbon price did not rise and companies were able to use dodgy offsets from overseas. If such a thorough undermining of a supposedly brilliant and effective self-regulating system could happen once, then it could happen again (with another change of govt).

This is solved by not opening the window to fraudulent credits. Or a commitment to make good on any credits which turn out to be fraudulent. Or both. That future governments might act in bad faith on emissions is an argument for the transparency of the sort an ETS provides.

Second, how high would the price of carbon have to go to shift people’s behaviour? And at that point is there the chance that you might get a general popular revolt that would undermine the political will to make the system to work as it should.

Good question. The Climate Change Commission says $50/tonne (p91). Basil Sharp et. al. say $85/tonne. In 2018, Concept Consulting, Motu and Public Policy Research said $76-$127/tonne. NZIER estimated far higher costs, also in 2018. None of this apart from NZIER looks scary with 29 years until the net zero deadline in 2050.

Anyway, non-ETS policies are far worse on a cost per tonne basis. Almost everybody acknowledges this. Cap and trade cuts at least cost. If your objection to the ETS is cost, you should be even more worried about other policies. As the joke goes, you do not have to outrun the bear to survive, you only have to outrun your colleague.

Officials have argued that the lack of transparency of non-ETS emissions policies buys enough cover to justify their higher costs. Except we have already had a public revolt mainly (though not entirely) against non-ETS emissions policies. I’d have thought is obvious that policies which add thousands of dollars to the cost of an imported car are going to be easy to spot. In any case, non-transparency is a non-argument for policies which have to work in the long run. Voters are going to it figure out eventually, and one might question the democratic merits of trickery.

Thirdly, there is the danger that emitters, rather than reducing emissions, basically rely on offsets. So, that will be great for increasing forestation, but it still might not change behaviour and reduce emissions

Which is just shifting the goal posts from emissions – you know, the thing that causes climate change – to changing behaviour and disrupting lives per se, which does not cause climate change. A tonne of emissions removed has exactly the same climate change benefit as a tonne reduced. From a climate change perspective, any distinction between reductions and removals is arbitrary. We should just do whatever combination of reductions and removals best helps the climate.

But try explaining to most environmentalists the idea that there is an emissions penalty that goes with arbitrarily insisting on reductions over removals, or domestic over offshore, or EVs over pretty much every other scalable way to avoid emissions. I cannot recall ever seeing an environmentalist say they are concerned we might lose 95% of the emissions benefits of a policy by insisting each tonne has to come from EVs and nothing else. The attitude seems to be who cares if we could have cut 20 times more emissions for the same cost?

I do. And when the rubber meets the road, so will voters. Time to get real.

Why so angry?

After a recent article in the Herald (ungated version here) I received the following email:

I realise that your objective is to advance a right wing agenda rather than provide factual information, but I was sufficiently annoyed by your article that I have provided media with the attached more informative article, to help people understand the real issues.

The article from my correspondent (I will not name him) was mostly about how EVs are good and will become great in the near future. I suspect he is right.

But that completely misses the point of my Herald piece.

My point is that having capped emissions with the Emissions Trading Scheme (ETS), to then tax or subsidise vehicles or anything else already covered by the cap will make no difference to total emissions.

This has nothing to do with the merits of EVs. Of course EVs can reduce emissions. But the emissions benefits of EV subsidies must be zero under a binding emissions cap.

The question I want to consider here is why an argument against ineffective emissions policies should lead somebody who is worried about climate change to feel angry.

I do not know my correspondent. I assume he was not the only person annoyed by my article. For the purposes of this post, I will assume people who feel angry reading my article:

  1. Are worried about the climate change.
  2. Believe greenhouse gas emissions cause climate change, and
  3. Support policies and actions which lower emissions.

What could lead someone who holds those views to object to an argument that we should oppose emissions policies which do not lower emissions?

Before I try to answer this question, let me first say I do not usually spend time thinking about peoples’ motivations on policy matters. My focus is on the merits of policy. Here I make an exception because I want to reach people who are concerned about climate and who see me as an opponent. If I can understand why people get mad, I have a better chance of communicating effectively and, ultimately, helping.

So let the speculation on where the anger is coming from begin.

First, the objective (lower emissions) is bundled with specific actions. Support for action on climate is support for more EVs, more renewables, less coal and petrol. These actions go with the goal of lower emissions like peas and carrots. EVs always mean lower emissions. Coal always means higher emissions. And more is always better when it comes to favoured technologies; for disfavoured technologies, less. No exceptions.

This view does not fit well with reality. It is probably not obvious, for example, that using coal and natural gas plausibly makes it easier to reduce emissions, or that further investment in renewables beyond some unseen limit in our electricity system will make it harder to achieve our emissions targets. See the ICCC final report on electricity.

For anyone who sees action on climate and getting more EVs on roads as the same thing, any argument against EV subsidies is going to look a lot like an argument against cutting emissions per se.

Second, the only alternative to taxes, subsidies and regulations to lower emissions is to do nothing. Here is James Shaw (at 43:00) saying exactly that to Parliament’s Environment Committee at a recent appearance, for example, after being challenged on the effectiveness of policies.

Such a conclusion is surely natural for anyone who has not heard of the ETS, or who does not know that it caps emissions, or who does not see the cap as credible, or who does not understand how a cap will generally neutralise other policies.

Shaw is in none of those categories, by the way – it is his cap! He introduced the legislation which gave the ETS its hard emissions cap. The bill passed last year.

I suspect another driver of this “alternative is doing nothing” view may have something to do with the idea that human agency is a necessary part of lowering emissions. Sure, the ETS will have some effect, the thinking might go. Profit-maximising corporates will always respond to the incentives of a carbon price. But we will not succeed, the thinking may go, unless somebody decides how and where emissions come down. Many seem to believe prices alone cannot bite hard enough to shift behaviours; we need more than incentives to overcome consumers’ myopia.

Third, I wonder if people are quick to suspect trickery lies behind any question of emissions policies? Sure, this person says he wants lower emissions, but perhaps there is a hidden agenda, either a political agenda or opposition to action on climate.

Another possibility is that the response to my article is a “rally behind the flag” effect. The classic example of rallying behind the flag is America’s response to the attack on Pearl Harbour by Japan in 1941. Political accountability for the catastrophe was put to one side. The focus was squarely on the forward-looking question of winning the war.

I do not think flag-rallying explains much in climate. Bad emissions policies are not in the past – they are not sunk, as it were. Policies are very much in the here and now, or in the future. They can be changed. Those policies will determine success or failure in the war on emissions.

If anything, rallying behind the flag should encourage not deter (constructive) skepticism of policies. Yet many people do not welcome questions about whether emissions policies work. If rallying behind the flag means overlooking past mistakes to focus on the mission at hand, climate policies are not a good fit.

Whatever explains the anger towards my article, it probably does not help that I am one of the only people saying emissions policies should work. It is striking how, out of all the people who demand action on climate, almost nobody has any apparent interest in the performance of the government’s emissions policies.

Anyway, these are my guesses about the psychology behind the interesting conundrum of why well-meaning, intelligent people who want action to reduce emissions feel genuinely angry when they see someone pointing out where emissions policies might not work.

This anger has consequences. It will, and almost certainly has, suppressed questions at the government on the performance of its policies.

We now stand at a precipice. In the next few months the government could commit to policies that will cost percentages of GDP but will not lower emissions, not by a single tonne. If the current track continues, we will end up materially poorer while doing nothing to help future generations on climate.

Surely, there no political constituency for that outcome? Yet that is the path we are on. Almost nobody is asking the government this most basic question: how does your emissions strategy cut emissions?

That question helps protect future generations. So don’t be angry at the person asking it. Be angry about the answer.

A solution searching for a problem

John Cochrane may be grumpy but he is possibly my favourite living economist.

In this article he makes a number of great points about climate financial risk. Here are two:

The idea that climate change poses a threat to the financial system is absurd, not least because everyone already knows that global warming is happening

Climate regulatory risk is slightly more plausible. Environmental regulators could turn out to be so incompetent that they damage the economy to the point of creating a systemic run.

One hopes that officials working on climate financial regulation in New Zealand understand the significance of knowing what has already been priced, and that regulation has costs and risk and if sufficiently-poorly designed could be a greater threat than the underlying problem. Officials seem to find market failure in a lot of places; regulatory failure less so.

Cochrane concludes:

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it – just as a decade’s worth of stress testers never considered the possibility of a pandemic.

Read the whole thing.

HT Jim Rose.