The Economist March 26th 2022 Finance & economics 77An EPICchallenge
I
f the worldeconomy fails to decarbonise, it will not be be
cause of the cost. The gross investment needed to achieve net
zero emissions by 2050 can seem enormous: a cumulative
$275trn, according to the McKinsey Global Institute, a thinktank
attached to the consultancy. But over a period of decades the world
would have had to replace its cars, gas boilers and power plants
anyway. So the additional spending needed to go green is in fact
much smaller: $25trn. Spread that over many years and compare it
to global gdp, and it looks significant but manageable, peaking at
1.4% between 2026 and 2035. And that is without counting the re
turns on the investment. British officials reckon that threequar
ters of the total cost of the transition to net zero will be offset by
benefits such as more efficient transport, and that the state may
need to spend only 0.4% of gdp a year over three decades.
The challenge of getting to net zero, therefore, is not primarily
budgetary but structural: how do you design politically viable
policies to ensure the transition actually happens? That is the
question Eric Lonergan, an economist and fund manager, and Co
rinne Sawers, a climate consultant, take on in their new book “Su
percharge Me: Net Zero Faster”.
The authors are not kind to economists, who typically want to
put a price on emissions and then let markets do the work. Econo
mists have, the authors allege, skipped a chapter in the textbooks.
They have focused on externalities, the damage done to society
when carbon is emitted. But they do not think about the elasticity
of demand—the extent to which prices change behaviour.
Carbon prices do not alter people’s choices much when there
are too few substitutes for dirty goods, or when those substitutes
are too expensive. High fuel taxes, for example, tend to provoke a
political backlash against environmentalism—think of France’s
gilets jaunes—but do not much alter transport emissions. Britain
has had one of the highest levels of fuel duty in the rich world in
recent decades, note Mr Lonergan and Ms Sawers, but drivers’
takeup of electric vehicles has been unremarkable.
The authors argue that getting people to make the big leaps
needed to decarbonise, such as buying an electric car or installing
a domestic heat pump, instead requires “extreme positive incen
tives for change” (epics). They laud Norway for exempting electric
vehicles from road tax, cutting their parking charges in half and
giving them access to bus lanes. (More than 90% of cars sold in the
country are now electric.) They propose big mortgage discounts
for homeowners who retrofit their properties. And they want the
state to generously subsidise lending to green projects while ex
empting them from a range of taxes. “To succeed we have to fight
on all fronts,” they write.
Their assault on carbon pricing is not entirely without merit.
The theoretical attraction of the policy is that it leads the market to
discover the cheapest ways to cut emissions, where behaviour is
easily changed, while allowing other parts of the economy to
choose to pay the toll. Economists in Barack Obama’s White House
were among those who puzzled over the “social cost of carbon”—
the optimal carbon price that would deter some emissions, but
not those that were sufficiently beneficial to the economy to offset
their effect on global temperatures.
But in a world of fixeddate netzero targets this sort of logic
loses power. Such goals concern all pollution, not just that which
is easily abated. Saying there is a maximum permissible amount
of global warming of 1.52°C above preindustrial levels—the tar
gets in the Paris agreement—is like saying there is a point at which
the social cost of carbon is infinite. In this world policymakers are
not setting a carbon price to distinguish between emissions. They
are trying to change behaviour. It may be that epics or invest
ments in green technology are a more politically viable route to
doing so than raising the carbon price to whatever level is neces
sary to extinguish inelastic demand for fossil fuels.
Yet the authors push their criticism of carbon prices too far.
They praise Britain’s adoption of wind power, but fail to note the
role that its “carbon price floor”, a minimum levy bolted on to the
eu’s emissionstrading scheme, played in the transition. They la
ment the “complexity” of carbon taxation, while also advocating a
fiddly green corporate tax. And they fail to notice the flawed politi
cal economy of their kitchensink approach. For example, they
call on central banks to provide the green subsidies they desire. To
whom would the central bank be accountable? And once the prin
ciple that monetary policy does not allocate capital is conceded,
what is to stop other demands being made on it? Carbon pricing is
simple and transparent by comparison.Casting the net wide
Moreover, there is an important role for carbon pricing even in a
netzero world. One area oftechnological possibility concerns the
removal of carbon dioxide from the atmosphere. The potential for
“direct air capture”, or a wellgoverned market for carbon offsets
such as planting trees, restores the logic of using carbon prices to
discriminate between emissions as well as simply deterring them.
If such advances materialise, the carbon price might eventually be
the exact cost of extracting carbon from the atmosphere, with the
marketdetermining the size of the gross flows on either side of the
netzero ledger.
Even if Mr Lonergan and Ms Sawers are right that some epics
are needed to make the journey to net zero politically easier, then,
economists’ longstanding arguments for carbon pricing still have
considerable merit. And the world has been slowly coming round:
in 2021 more than 20% of greenhousegas emissions were covered
by a carbonpricing scheme, up from about 5% a decade ago. The
path to net zerowillinvolve more than setitandforgetit carbon
pricing. But economists’ favourite climatechange policy remains
an essential one.nFree exchange
Have economists led the world’s environmental policies astray?