Case 2 - The changing climate of world opinion

The government website shown at the foot of this table contains useful details not merely of the draft proposal but of other aspects of government policy. It is also helpful to get an independent perspective. For details of the ongoing climate change campaign, see www.wwf-uk.org/news/ccc.htm

Different countries face different marginal costs of emissions reduction. Economic efficiency would be achieved by making countries with a lower marginal cost of cutting back do more of the quantity reductions. Two institutional mechanisms might help bring this about. One is a pollution tax which effectively makes people bear the costs of the environmental damage that they create. Firms with low marginal costs of abating pollution would then find themselves cutting back pollution a lot in order to avoid the tax. Firms with few possibilities to cut back would end up paying a lot of tax.

Ideally, the tax rate would be set equal to the marginal benefit to the plant of achieving less greenhouse gas emission (also equal to the marginal cost of a little more emission). Each person or firm would then arrange their own behaviour until the tax they paid equalled the private cost they could incur to avoid the tax by cleaning up their act. This outcome would be efficient because everybody would end up with the same marginal cost of abatement, and all of these would equal the marginal benefit to society of abatement (provided the tax was set at the right level). In 1997 the Financial Times (14/2/97) reported that 2000 economists, including 6 Nobel Prize winners, had signed a statement calling for new carbon taxes to reduce emissions of carbon dioxide.

Chapter 16 argues that welfare economies is about equity as well as efficiency. One reason that multicountry agreements are so difficult to negotiate and enforce is that the proposals affect different countries differently. They have redistributive effects as well as efficiency effects. Within a country, the national government can always redistribute to offset distributive effects of other policies. Internationally, buying off the losers is usually more difficult.

Because a carbon tax would hit different countries very differently, and because there might be initial suspicion about whether promises to redistribute tax revenues across countries would be subsequently honoured, an alternative solution may be tradeable pollution permits.

Under this arrangement, each country would be given an annual allocation of pollution permits. These might even go to existing private polluters. The permits would be set at levels that ensure global pollution fell steadily. However, those initially allocated permits would be free to retrade the permits. Firms that found it hard to cutback would buy permits from firms that could cheaply cut back. The latter would be happy to take the revenue instead.

Permits set up a market in pollution and allow Adam Smith's invisible hand to work. They should be capable of moving the global economy towards a much more efficient solution than at present. And the initial allocation is effectively what determines the distributive implications of the whole package. The politicians can argue about that, but then a credible mechanism is in place, combining the need to make sure that total emissions come down and the need to accomplish this in an efficient, equitable, and transparent manner.

An economists' fantasy? Certainly not. Tradeable permits have been used for years in the United States, for example to regulate emission of the pollutants that give rise to acid rain. Details available at the website of the US Environmental Protection Agency (www.epa.gov.uk/acidrain.) Those of you who care enough about the planet have the perfect birthday gift next year: buy your friends a tradeable deficit permit and then have a tearing up party: global pollution will fall because one of the issued permits was in fact unused!