Fraser Forum

William Watson: Among the ecofiscalists

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My friend and McGill colleague Chris Ragan is also the founder and current chair of Canada’s Ecofiscal Commission, a foundation-supported group of prominent Canadian economists and others who have given themselves the mission of selling Canadians on carbon pricing. Although I have written several columns generally critical of the commission’s various reports I found myself Wednesday evening joining a small dinner of its supporters, members and funders.

The topic was how things are going, what else can be done, what the remaining problems are, and so on. A number of the other diners were very well-informed about energy and climate matters, which are, like most real-world phenomena, very complicated. In dealing with climate policy we’re dealing with two complex general-equilibrium systems, Earth’s atmosphere and Earth’s economy. If economics teaches anything, it’s that tinkering with complex general-equilibrium systems can have surprising and painful consequences.

Good manners prevent me from repeating in any detail what I heard. But there were two main themes. First, that there are all sorts of exciting green innovations going on, in several of which the world is on the verge of a tipping point that could be hastened with just a little extra push from governments, whether a hundred million dollars here or a smart re-jigging of regulations or procurement policy there. Second, current carbon prices, which range in Canada from zero to $17 to $30 per tonne of carbon aren’t yet inducing the changes on the demand side that we’ll need if carbon emissions are to reach safer levels for the planet.

My own brief intervention was a reaction to what I’d heard. I’m an economist, I said, so I don’t know much. (No one objected!) In economist school, they teach you two things. To begin with, precisely that you don’t know much and never will know much in comparison to the (almost literally) infinite complexity of a modern economy. That goes all the way back to Adam Smith, who in the eleventh paragraph of the Wealth of Nations asks us to consider just how complicated an enterprise it was to get a simple wool coat onto the back of a humble English day-labourer.

But the second thing they teach is that it’s OK that you don’t know much. You don’t need to know much. You’ve got the price system (if you can keep it). The price system is a colossal computer, bigger even than my namesake, IBM’s Watson. It works out all the calculations for you. In the end, in well-functioning markets, the price of absolutely everything embodies both cost and benefit—the cost of producing whatever good or activity we’re talking about and the benefit to its consumers. The most important thing you have to understand as an economist is the (almost literally) infinite value of such a system. 

Of course, you also have to understand that sometimes the price system fails. Ideally, it does “price in” all the costs and benefits of everything. But in some cases it clearly doesn’t.

People’s production of greenhouses gases is one such case. It generates costs, or at least climate science suggest it does, but no one pays these costs. The beauty of the price system, however, is that the only fix you need is to get the price right and then sit back. With greenhouse gases, getting the price right is hard because no one really knows the true cost to humanity of an extra tonne of, say, carbon dioxide put into the air. But if you do get the price at least approximately right, you don’t need to fool around with green strategies. The price system will take care of all that. As long as the spirit of profit-making isn’t dead in your society, commercial considerations will lead people to respond to carbon costs in thousands, probably even millions of different ways.

My final point—maybe it wasn’t such a brief intervention—was that there’s also a big political benefit to letting the (slightly amended) price system take care of the problem. If carbon prices really are too low, and if they really do have to go up by a lot, maybe double, triple, quintuple or even more, to get people to start changing their behaviour, then for people to buy into the program you’re going to have to give them their carbon taxes back. It’s fine to tell people the money is being put back into “the economy” through green subsidies and loans, but it’s not being put back into their economy. And, given Canada’s high rates of carbon emission, if you raise carbon prices by a big whack, you’re going to hit people’s incomes with a big whack—which for perfectly understandable reasons they are bound to resist.

So if you want the high carbon taxes you think the planet needs, you’re going to have to give people their money back, either by cheque or with cuts in other taxes.

That’s what I thought I learned among the ecofiscalists. 


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