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https://www.valigiablu.it/crisi-climatica-libero-mercato/
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The weekly round-up on the climate crisis and data on carbon dioxide levels in the atmosphere.
The climate crisis is a fact, as is yours anthropic origin:The relationship of the 2021 IPCC showed that the increase in temperature compared to the pre-industrial age, thanks to empirical research and numerical simulations, depends mostly on human activity.
Yet still today, in one mixture of ignorance and bad faith, there is no shortage of inroads in public opinion and politics to discredit the efforts of scientists, activists and a part of the ruling class who are pushing for an ecological transition, both from a legislative point of view and from the point of view of electoral consensus.One of the arguments used in Italy and abroad by the conjunction of climate deniers and inactivists is the one according to which the climate transition it would be ridden from the left to impose dirigiste and statist policies, motivated more by hatred for the free market than by science.
This argument, however, upon careful analysis, is based on an attempt to stir up "cold war" bogeymen to delay the ecological transition.The situation, in reality, is much more complex.
What we talk about in this article:
The economics of the climate crisis
Not even those economists considered most a wrong who rightly believe that the champions of the free market believe that this alone can manage a phenomenon such as the climate crisis.The reason has a very specific name:externalities.To understand it, even approximately, it is useful to provide more coordinates.
When economists try to understand how markets work they usually study the intersection between supply and demand for a certain good.However, supply and demand are based on the behavior of consumers and businesses that are part of the market, and who are primarily concerned with their well-being, in the case of consumers, and their profits, in the case of businesses.
When certain conditions are met, the process is successful and everyone obtains the greatest profit possible (at a technical level it is said “Pareto equilibrium").However, there are cases in which these conditions do not occur;in reality, almost never.In this case we are talking about market failures.It is necessary to underline that the term is to be understood in a strictly technical manner:market failures are not situations of high inequality and concentration of wealth in the hands of a few.Among the cases of market failures there are, in fact, the externalities.
In an ideal context, like the one before, consumers and businesses only look out for their interests and this all in all works.But what happens when someone's interests harm someone else without paying any costs?This is, perhaps in a simplified way, the concept of externality.The simplest example is, in fact, emissions.
Let's think of a company that produces a certain good, but in the process emits polluting gases that have negative repercussions on people's health and the environment.To the extent that the cost of emissions does not fall on the company's balance sheet, there is no economic incentive to push it to reduce them (although economic incentives are not the only reasons).In a market of this type, the greatest possible well-being is not achieved for all market participants.
Even economic theory admits state intervention in this case.To restore well-being, the State should make the company pay the cost of harmful emissions, thus changing its production through prices.In practice this translates into a carbon tax, one of the most popular measures by economists to combat the climate crisis.
Over the years various governments have imposed restrictions carbon tax, some with positive outcomes, other times with less egregious outcomes.The most interesting case is certainly that of the Canadian region of British Columbia.In 2008 the province decided to introduce a carbon tax without any exemption:both consumers and companies that wanted to consume polluting goods would have to pay a surcharge.But the revenue obtained from the tax was used to cut citizens' taxes.Therefore an economic agent would have had on one hand a cost, the one obtained from the increase, but on the other the benefit of a reduction in taxes.This pushes citizens and businesses to reduce emissions, to have a greater amount of money in their pockets, so to speak.After all, the data is there to prove it:Fossil fuel consumption fell by 17% in the first four years, while in the rest of Canada it increased by 1%.
What we saw in the example on British Columbia is one of the cornerstones of the so-called policies market based to combat the climate crisis:the change of citizens and businesses passes through the price system.Let's take a simpler example:a meat tax, or a tax on meat, which as the data shows has a impact on emissions not insignificant.If a government introduced such a type of tax, citizens would see the price of meat at the butcher or in a shopping center increase.For this reason, again in theory, they would shift their consumption to other types of foods, such as vegetables and legumes.
The problem of market measures
From the example just cited, we can clearly understand the problem that, in reality, appears when we talk about this type of policy.If economic theory tells us that consumers, under certain conditions, will reduce their consumption of meat or other polluting products, in reality, rather than reducing consumption, they will be angry with the government that launched the proposal.A paradigmatic example comes from France.Where, in 2018, President Emmanuel Macron decided to respect the increase in fuel taxes decided by his predecessor Francois Hollande.This would have been a hard blow for categories such as truck drivers who, in fact, they took to the streets harshly contesting the French president and the government of Edouard Philippe, even if the protests were supported by the main opposition party, namely the National Rally by Marine Le Pen.
This may seem like an isolated case, mere anecdotal passed off as statistics.But a Work researchers from the International Monetary Fund recently investigated the political impact, i.e. on the consensus of government parties, of climate policies.What emerges from the study?One of the findings highlighted by IMF researchers is that the negative impact on climate policy consensus depends on how the policy in question is designed.
In particular, the policies market based, which like the carbon tax they act on prices to guide consumer behavior and generally reduce the consensus of the parties that launch them.This does not mean that they should be completely abandoned.Policies like the carbon tax represent a necessary condition to combat the climate crisis, but it is necessary to take into account aspects such as equity and the distribution of resources, to avoid that the less well-off and average segments of the population that they already carry on their shoulders today pay the price the weight of events extremes.The case of British Columbia is a textbook case:if you don't want to alienate the citizens' consent, you must guarantee a form of compensation that promotes sacrifices.
The policies market based, however, they are not the only alternative.While these apply to prices, policies command and control they instead apply to quantities, defining rigid standards on emissions or environmental issues:the most banal example is ban on registration of petrol or diesel cars in 2030 like what is being discussed in Europe in recent months.On the other hand, acting on quantities and not on prices can be more efficient in the case of the climate crisis, as research also shows economical.Why this?
As explains Andrea Roventini, full professor at the Sant'Anna high school in Pisa, policies that act on quantities then have repercussions on technological progress.A company, aware of the limits imposed by the State, for example on the sale of diesel or petrol cars, will be forced to invest in - for example - electric cars.This, explains Roventini, is part of another debate that is affecting the world of legislators and economists:since companies cannot do everything themselves, a return to industrial policy is necessary.
That is, these are interventions by the State to modify the economic system, directing it towards desired objectives, in this case the ecological transition.In a Work of 2014, Harvard economist Dani Rodrik, one of the best-known supporters of industrial policy, underlined the importance of state intervention in the field of ecological transition.In the study, Rodrik also shows various cases, including the German and Chinese ones, of interventions on this front.Mariana Mazzucato, professor of Economics of Innovation and Public Value at University College London, also underlines the importance of rediscovered of industrial policy for climate crisis, for example through Mission Projects (Mission Oriented Projects).In this type of project, as happened for example with the moon landing, the State decides an objective to achieve which could, for example, be the complete transformation of car production, collaborating with private individuals and the world of both basic and applied research.An approach similar to what was proposed by John Van Reenen, professor of economics at MIT, in a recent contribution for theHamilton Project:the study of the American system, made up of agencies, is crucial public like DARPA that have proven effective in catalyzing innovation.
Remaining in the United States, already the administration Obama had decided to focus on electric cars, granting, among other things, a guaranteed loan to Elon Musk's Tesla car company.But with the Biden administration, which unlike the Trump administration does not deny the climate crisis, there has been a decisive change of pace.The main provision is the Inflation Reduction Act (ANGER):despite the name of the provision suggesting something else, it is a gigantic plan of the Biden administration to subsidize the green transition of American companies.The plan calls for spending $400 billion on subsidies, tax credits and the development of clean technologies such as wind and geothermal.Among the measures plus discussed there is certainly that of the $7,500 discount for the purchase of electric cars if the components were purchased and assembled in the United States or allied countries.According to the estimates of the Rhodium Group, the impact on emissions ofANGER it could be considerable, reaching a 40% drop in emissions compared to those of 2005.
Even Europe, precisely to counter Biden's moves, he's trying to address himself towards a more interventionist industrial policy, despite persist of mistrust in various countries.However, this renewed interest in industrial policy and therefore in state intervention in the economy is not painless.As they wrote the two experts Daron Acemoglu and James Robinson, the risks regarding state intervention are not of an economic nature, but of a political nature.Far from being enlightened rulers, politicians are economic agents like others, interested in personal gain.They could therefore use industrial policy, as happened in Italy with the IRI, for purposes of consensus and power, rather than to guarantee growth and technological progress.
The costs of the ecological transition
In addition to industrial policy, state intervention also involves covering the costs that the ecological transition will necessarily bring with it.As one explains study of the European Parliamentary Research Service, Although the green transition will lead to long-term economic benefits, there could be significant costs in the short term.This is one of the aspects that needs to be underlined:the issues being addressed are complex and it is crucial to also communicate to the general population, who often does not have the time to be interested in certain aspects, that the transition will be an extremely delicate process, with costs.
Technological progress, which is necessary for the ecological transition, is characterized by what the economist and philosopher Joseph Schumpeter called “creative destruction”.Also in this case an example will help to clarify.Until about ten years ago in our cities there were shops where it was possible to rent video cassettes and DVDs of films released recently at the cinema.Then came Netflix and similar platforms which, thanks to lower costs for the consumer, took over the market, pushing video rentals to close.
In the case of the ecological transition it is the same:there are sectors that will necessarily have to be abandoned and, at least in some, the workforce will be smaller.Let's think, for example, about the number of workers it will take to produce a car electric compared to the traditional one.This therefore requires a system of welfare and protections, together with interventions on training, which cannot fail to pass by the State.
The free market does not exist, only regulated markets
The discussion carried out should lead us to one conclusion:in the case of the climate crisis, but not only, the free market is only a rhetorical expedient to avoid dealing with the problems.In history, as various economists maintain, there are no systems such as the free market, but rather regulated markets which contemplate, among other things, state interventions.The strategies to combat the climate crisis and push for the ecological transition therefore pass through more subtle issues - from the implementation of the policies to be adopted, the understanding of how companies and consumers will react, the political limits.
And to do this, on the one hand, we will need a regulated market capable of focusing on clean sectors and ready to embrace growth, and on the other a State ready to catalyze innovation and guarantee protection to those people who, in the meantime, risk being left behind .
Preview image via rti.org