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Bulletin of the ERI, 2007/08 no. 3

Contents: July 2008

An economist's carbon conundrum

    The Stern Review of the Economics of Climate Change described uncontrolled carbon emission as “the greatest and widest-ranging market failure ever seen.” It added: "An effective response to climate change will depend on creating the conditions for international collective action." But, as the recent G8 summit has shown, international collective action is very difficult to achieve. Without these conditions being established, it is hard to see how or why many national governments would take action on their own.

    Given that, many concerned people are taking part in local collective action and even private voluntary action. Private voluntary action means calculating and trying to reduce your personal carbon footprint by buying local food, installing energy-saving light bulbs, trading in your 4×4 for a bicycle, and taking your next holiday on the Cornish Riviera, not the Italian one. The Royal Society, for example, has created a website to help you calculate your carbon footprint (www.rsacarbonlimited.org).

    Local collective action projects range from neighbourhood Carbon Reduction groups that pledge their members to a “lower carbon lifestyle” (www.cred-uk.org) to direct action groups that seek to blockade airports and power stations. Among British teenagers, environmental issues are said to be associated with increasing peer effects. According to a report in The Guardian (“Green teens back eco-guerrillas,” January 10, 2008) more than one in eight 16-19 year olds would ban air travel for leisure; one in ten would ban car travel if the outlook does not improve; nearly one in ten would back “guerrilla activities” carried out by environmental groups. Strong peer effects are said to contribute to the spread of these views.

    Unintended consequences of voluntary action by concerned individuals and groups are a clear problem. Suppose one part of the world cares about carbon emissions and the other part doesn’t. Of those that care, many will be too poor to emit much carbon or have much discretion to reduce personal emissions. So, the scope for personal and local action lies with the caring rich. If they succeed, they will somewhat reduce the global demand for carbon based products and activities. As a result, the relative price of these products and activities will be lower than otherwise. In direct consequence, the carbon emissions of the uncaring are likely to increase more than otherwise, partly offsetting the efforts of the caring.

    Worse still, a lower real price of carbon fuels would shift the composition of energy demand adversely. Lower coal and oil prices would undermine the demand for the carbon-saving technologies now being designed to save the planet. Renewables and nuclear energy would become less attractive than new coal and gas fired power stations.

    In short, the lifestyle changes of the caring rich will tend to create market opportunities for the uncaring. The good example of some will be offset by the bad example of the rest. Those who volunteer to do good, and fail, may become disillusioned and cynical. Many will give up; some will persist; a few will turn to direct action, lying down on runways, and planting bombs under power lines.

    Most economists would see an effective solution in putting the real price of carbon fuels up to all consumers through a carbon tax or cap-and-trade licensing. Only higher global carbon prices can change the behaviour of the caring and the uncaring alike. This global price increase cannot be brought about by private or group action. It requires market intervention at an international level. But the will to intervene at this level is proving painfully difficult to establish. It may emerge too slowly, or not at all.

    At this point economists should stop and think. There is a tremendous energy in the voluntary motivation and concern of the world’s caring rich. How can we tap that energy for good? Economists don’t seem to have an answer to this question; instinctively placing the full burden of responsibility where it belongs, on international governance, we dismiss the sum of individual energies for change among consumers and producers. Here is an economist's carbon conundrum: are there systematic mechanisms that we can design to let this human energy to be used productively?

    Mark Harrison

    Mark Harrison is director of the Economic Research Institute and chair of the Department of Economics.