Climate Bill scores a fail in economics

Which leads us to the next important question, how high should that tax be? That question bringing us back to a c/b analysis; what are the effects of carbon emissions going to be in cash terms?

Note, please, that by "cash" we do not mean simply money, we are converting economic resources into a number, one which we can then compare with others. "Economic resources" does indeed mean the ability to vaccinate a child, to comfort or cure the sick and the halt. The total capacity of our current technology and the organisation of the society to go and do things, that's what we're trying to measure. More is better here: while it's obviously true that not all the resources are indeed used to vaccinate poor children (and I'm certainly with the idea that more should be so) having more resources does at least potentially allow us to do such things. Similarly, less is worse here for it constrains the choices we can make about what we do go and do.

Here there's a great deal of argument. William Nordhaus thinks that we should start low and raise the tax over the years. Perhaps $5 a tonne CO₂ now rising to $200 and more in some decades' time. His thinking is heavily influenced by the capital cycle. We don't want to throw away perfectly good functioning plant that we've got now but we do want to make sure that, over the decades, as we replace plants, build cities with or without suburbs, that the correct new investments are made. Nicholas Stern (and there are many others between the two for various different reasons) in his report said it should be $80 a tonne now, largely based upon his rather apocalyptic view of the damage the climate change will do plus a rather odd view of discount rates (no, don't ask). So there's a difference about the numbers: but all agree that such a carbon tax actually solves our problem. No, it doesn't matter what the money is spent upon, just that that cost of carbon gets encapsulated in market prices. Thus every polluter is paying the cost of their pollution and thus we get the optimal amount of it, just as market pricing gives us the optimal amount of bread or of Pokemon characters.

Fully paid-up already?

Now there will be those who ask whether I've lost my marbles at this point (those who aren't already sure that I have) because of course such a plan would be hugely expensive, wouldn't it? Well, actually, if we're to be honest about this (and this is one of the dirty little secrets about climate change in the UK), no it won't be all that expensive. If we take the Nordhaus numbers then we're already paying vastly more in environmental taxation than a proper carbon tax would require. But even if we took the much higher Stern numbers we're already paying roughly the correct amount: we're just paying it in the wrong places.

Stern told us that the social cost of one tonne of CO₂ emitted was $80. Defra uses a costing of £25 a tonne or so (and there are boring technical reasons why these two different numbers are in fact the same). OK, let's use these. Air Passenger Duty thus already covers the CO₂ costs of flying. Fuel duty is higher, much higher, than needed to cover carbon costs (a cut of some 13p a litre would be needed to make it accord with Stern's numbers). Look at it another way. Annual emissions in the UK are some 500 million tonnes CO₂-e (equivalent, converting methane etc to CO₂ so we can count, that apples and oranges thing again). At the Defra costing that's £12.5 billion a year. So that is the required carbon tax and if you add up the various taxes we're already paying, fuel duty (that part of it at least, the rise in the fuel duty escalator since 1993), APD, landfill tax and so on, we're already paying more than that.

And that rather surprising answer is I think the reason that I'm not really all that worried about climate change nor the costs of dealing with it. As the Stern Review insists (and as many other economists do as well) all that is required is that carbon tax, a so called "Pigou Tax". And as we Brits are so heavily taxed already that we are already (with perhaps a little bit of shifting it around) paying the necessary sums, whatever it was that we needed to do to beat climate change we've already done. And all other countries need to do the same is to become more like Britain.

Which is really rather a relief, don't you think? ®

Tim Worstall knows more about rare metals than most might think wise, and writes for himself at timworstall.com, and for The Business and the Adam Smith Institute, among others.