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Economics for environmentalsist in one short volume

Bishop Hill has a review of Tim Worstall’s book Chasing Rainbows, which reminds me that I
meant to write about this book. I wrote a cover quote for it that
described it `fearless, fresh, forensic and funny’.

What is particularly clever about the book is the way that
Worstall makes economic theory so digestible, even delicious. He
refutes the dreary cliche so popular among environmentalists that
economics just `does not get’ the environment (by which they
usually mean that they would like to do the equivalent of repeal
the laws of gravity and make things to happen even if they make no
sense for people: like getting people to give up cheap forms of
energy to take up expensive ones). Quite the reverse is true:
environmentalists all too often just don’t get what economists are
trying to tell them.

I especially liked this little section which so neatly
eviscerates the Stern Report:

That climate change is a market failure does
not, as has already been pointed out, mean that all markets have
failed, that all possible variants of markets will fail to deal
with this problem, only that the market system as currently extant
is failing to deal with this specific problem. Our choice of how to
use markets to rectify this comes in one of two flavours: we can
either shoehorn the problem into current markets or we can create a
new market to deal with this problem.

Shoehorning comes from (as Stern goes to
great lengths to point out) the acknowledgement that emissions are
an externality. They are an effect of our actions which are not
currently included in the market prices which guide our actions. As
Marshall pointed out at the turn of the last century and as his
successor Pigou went on to solve for, we know what to do with
these. We add a tax to the action so that market prices now reflect
the true costs of said actions. We’ve even got a number from Stern
as to what that tax should be: $80 per tonne CO2.

We ought to take a little detour here to
discuss the validity of that $80 and truth be told, there’s not a
great deal of validity to it. The Stern Review plays a number of
tricks to get to it. The first and most obvious is that all of the
calculations are based upon only one of the four families of
possible economic (and thus emissions scenarios) that the IPCC
itself considers. You don’t have to be as cynical as I am (although
I prefer “realist” when trying to describe my bleak and total
cynicism about the actions of politicians and their hirelings) to
guess that he used the very worst of those economic models, the
family that produces hugely high emissions by comparison with the

No, sorry, let me backtrack a little. He does
use another set of emissions: one he made up for the task. One that
the IPCC hasn’t considered and one which is, yes, you guessed it
(see, told you, realism) even worse. So our $80 is based upon as
bad as the IPCC thinks it could be and worse: no consideration is
given to the idea that it might not be that bad but that’s still
part of where we get our $80 from.

The second trick is that Stern essentially
invents a new way of dealing with discount rates. No, we’ll not go
there, it’s very long and boring but let’s just say that his
treatment of this issue received a great deal of commentary
(“commentary” is the polite way economists describe making the
point “You did what? But, but, don’t you understand the
implications of that? Buffoon!**”) from economists who had actually
been working within the IPCC structure, economists like Sir Partha
Dasgupta and Richard Tol.

A third trick, well, no, not really a trick,
rather a gross oversight, comes in the treatment of the
technological and capital cycles.

One of the great arguments in economics (it’s
at the heart of what all those talking heads on the TV screens are
shouting about, recession, unemployment, government spending and
the rest) is about how quickly things happen. If this bit of the
economy over here changes then how long does it take for that bit
over there to adjust to it? A Keynesian (or even a New Keynesian,
although for slightly different reasons) will think that in a
recession then wages won’t change, won’t change quickly enough at
least, which is why we get unemployment. A New Classical (or again,
for slightly different reasons, a Real Business Cycle theorist)
would say that of course wages will adjust, near instantaneously
and thus there cannot be recessions and whatever it is that we’re
seeing is caused by something else. Entirely. No doubt at all. That
however is macroeconomics, as PJ O’Rourke pointed out, the part of
the subject where we’re reasonably certain that we don’t know what
we’re talking about.

However, microeconomics (the bit where we
know a bit is correct at least) covers the same point about how
quickly things happen. For example, we know that the short and long
term effects of tax changes are different: it takes time for people
to change their behaviour. We also know that we’ve something we can
call the technological cycle: how long does it take to get some new
whizzy way of doing something into the hands of people who will use
it to do whizzy things? Specifically, here, with climate change,
we’d like to know how long it takes to get some nice new low carbon
technology thought about, developed, tested, manufactured and thus
really ready for use. Given that windmills have been around in
Europe since at least the 12 th century we can see that it can be a
fairly considerable amount of time.


By Matt Ridley | Tagged:  rational-optimist