We are losing the battle against global warming. According to NASA, the earth suffers the highest levels of CO2 in 600.00 years. The average temperature of the planet has risen 0.9 degrees centigrade since the late nineteenth century and most of the warming is recent: the five warmest years have been recorded since 2010. This warming is visible to the naked eye: the Greenland ice sheets and Antarctica have been reduced, all glaciers decrease in size and snow in the northern hemisphere has decreased substantially.
There are two main obstacles to action: first, the political difficulty that all democracies face in taking the (costly) necessary decisions, particularly due to their impact on inequality (as we have seen recently in France with the disturbances of the "yellow vests" after the rise of the tax on diesel) and growth. Second, and related to the first, the opportunism of some countries, which prefer that the effort be made by others. For both obstacles, novel solutions have recently been proposed.
To understand the problem from an economic point of view, the starting point is to understand the usual role of the price system. Prices are a signal that serves to coordinate the behavior of all consumers and producers. If there is a frost in Brazil, and the coffee harvest disappears, coffee will be scarcer. Could a centralized system, even using the most powerful computers, decide who will consume less coffee, what trucks will stop transporting coffee, what shelves in the supermarket should they stop using coffee? No. Nobody has the necessary information to make that decision: nobody knows how much their coffee cup needs a specific consumer.
The price system coordinates all these decisions voluntarily in a decentralized system, where each one makes his decision independently. Coffee will go up in price, and when we go to the supermarket, those of us who do not have great interest in coffee will buy tea. The supermarkets, at the new prices, will sell less coffee and adjust the shelves. The same will do carriers and coffee factories.
For this to happen, resources have to have a price. But some resources are priceless. In economics we speak of "externalities" to describe these situations. Pollution is an example. There is no mechanism that causes drivers to choose to drive less when global warming gets worse, because the emission of CO2 into the atmosphere is free.
In these cases, economic theory teaches us that we must use the tax system (or alternatively, a system of transferable permits) so that consumers face the real cost of their decisions. Thus, a company that has to choose which machine to buy, will have the right incentive to buy the one that generates less CO2.
The problem is that this way of acting, as we have seen in France in graphic form, has a clear distributive effect: if we raise taxes on fuels, those with lower incomes and those who live in more rural areas and therefore drive more , they will have to face higher costs.
What solution can we give to this problem? The climatologist and pioneer in the fight against climate change James Hansen has made an intelligent proposal, which could be politically viable: he calls it "rate and dividend". It is about introducing a tax on the consumption of fossil fuels and returning all the proceeds, with an identical dividend per head, to all citizens. The transfers that this implies are large and have a progressive effect: they would suppose a 10% increase in the income of the poorest families.
The second problem to which we have referred is, if possible, even more complicated. As all countries benefit from the efforts of others to improve the climate, each country prefers not to do what it has to do. Like anti-vaccines, which hope not to catch a serious disease by taking advantage of the immunity of others, many countries (especially now the US) prefer that the cost of cutting the use of oil and coal be incurred by others. The problem is that immunity and a clean environment, such as street safety, are "non-excludable" goods, that is, we can not exclude anyone from enjoying them.
The economist William Nordhaus explained an intelligent solution to this problem in the speech he gave on the occasion of his reception of the Nobel Prize in Stockholm on December 8 last (speech that, incidentally, illustrated with a slide of the "Colossus" a picture of the Prado , of the black period of Francisco de Goya that illustrates, for him, the risk for the planet of climate change). It is about forming a club with the other countries that do their part against fossil fuels. The countries that are not in the club, will have to pay an equivalent tax (in the USA there is talk of a "border adjustment tax") to be able to export the members of this club. This import tax could be designed at a sufficiently high level so that countries outside the club would end up being interested (even acting selfishly) to introduce their own measures to reduce the consumption of fossil fuels.
In short, the problem of climate change is a political problem: to get Western societies, and developing countries, want to incur the costs necessary to solve the problem. The two solutions I have suggested here, "rates and dividends" to avoid the negative redistributive effects, and "climate clubs" to make all countries interested in acting, can make a problem that is, in principle, almost intractable, it becomes something that ends up interesting all countries. Lacking the courage to put into action solutions to a problem that is existential for our planet.
Luis Garicano is a professor of Economics and Strategy at IE Business School and responsible for Citizen Economics. His book "The Liberal Counterbalance: between technological dizziness and populist chaos" will be published in January 2019.