FREE MARKETS & ENVIRONMENTAL PROTECTION
Greta Thunberg. Her name has been appearing in the news and most well-known newspapers for at least the last year and a half, increasing her presence in the media during the last six months. Thunberg is a sixteen-year-old self-proclaimed climate activist, who launched the Fridays For Future movement, which is a civil society mobilization to reduce the human action effects on climate change; as for example our Co2 yearly footprint. Their end is of course honourable and desirable. I haven’t heard anybody yet (except for the villains in Disney’s films) say that they want to warm up and destroy the world by promoting and incentivizing climate change. So, everybody minimally rational wants to protects the environment, right?
So, what’s wrong with Greta Thunberg and her movement, you might be asking yourselves? Well, definitely no their ends, but the proposed means to achieve it. You just have to listen to some of Thunberg speeches, read a couple of her articles… and voilà!.. you’ll discover her deep anti-free market ideology. She blames everything on capitalism, and makes strongly interventionist proposals to try to “save the world”. I won’t enter o judge if her proposals are effective for environmental protection in the long term, but I can confirm you that she has a profound lack of knowledge about basic Economics, mainly about market incentives. That’s what I will try to demonstrate throughout this article. This is obviously not a personal thing against Greta Thunberg, but against some of the ideas she promotes. So, let’s firstly demonstrate why some of her ideas are completely flawed, to later on, propose some free-market solutions for environmental protection.
The Fridays For Future movement has proclaimed on many occasions that their main goal is to have at least a 75% 0-emissions energy share out of the total energetic mix, while in many European countries this contribution to the total energetic mix is less than 35% in almost every case, and less than 30% in more than 50% of all EU countries. Thunberg is normally confronted with the argument that such a fast energetic transition will make energy prices skyrocket, due to the actual lack of infrastructure and generation means. This increase in prices will obviously have a regressive effect on society, as those who direct a greatest part of their income to energy consumption are households in the lowest quintiles of the income distribution ladder. The Fridays For Future members have partially ignored this argument, as they have just provided one solution to this problem, that according to them, will also help to reduce emissions in the short term. They are asking for 180 euros tax per tone of emitted Co2. For my Spanish readers to understand the impact of this tax, I will use Luis Gomez’s calculations and example (Luis is a Spanish bio-chemist working in Germany):
“In Spain, where we produce around 325 tone of Co2 per year, the total bill of such a tax will be around 58.5 billion euros per year. For you to make an idea of such quantities, in 2018, the Spanish Government spent 51.3 billion euros in education (4.3% of GDP)”
But why are massive and coercive carbon taxes not a solution? Why is there a free-market solution, including Pigouvian taxation?
Firstly, let’s talk about carbon taxes. A carbon tax is not an idea I completely disregard. I partly appreciate its intentions and sometimes even its ends. But in my opinion, this carbon tax, to be effective and fair (not fiscally coercive) should be revenue neutral, or at least, the revenue collected from that tax should go towards those more directly affected by pollution. Why? Very simple. They are called negative externalities. But what are externalities? Well, “externality” is the technical name given to those indirect effects; either positive or negative, caused by an activity developed by a third party, in which you are not involved. For example, if someone opens a cycling shop in the city centre, that might help lower the level of pollution in the atmosphere indirectly, or if someone smokes near you, you’ll become a passive smoker even though you haven’t chosen to smoke. What happens with pollution is pretty simple to the latter example. A factory may impose negative costs (not only monetary) on third parties not related to it, so to internalize that cost, the State will intervene and introduce a carbon tax, or Pigouvian taxes, which receive their name due to the well-known British economist Arthur C. Pigou. This tax will not only internalize costs, but also disincentivize this activity by presenting its real costs.
The key for achieving a high level of efficiency through this tax, is that its purpose should not be maximizing revenue, but minimizing costs for third parties. Let’s put one example when a carbon tax was very badly employed and a second case when it was perfectly introduced. Firstly, we will all remember President Sanchez proposal of a new diesel tax, increasing the price of diesel up to that of gasoline. This was a pretty bad employment of the carbon tax, as it affected mainly those who were more dependent on diesel, mainly small businesses with vans or drivers of big family vehicles, so it will be in this case a regressive tax, affecting more those on the lower sectors of the economic ladder.
One case when Pigouvian taxes were perfectly employed was that of Canada. Justin Trudeau followed the recommendations of some economists as Gregory Mankiw, and decided to impose an extra charge of 20 dollars per tone of Co”, that will reach 50 dollars per tone at the beginning of 2022. But this is not the good part. The good part is that 90% of the revenue will go back Canadian citizens in the form of checks, so the Government won’t decide on what to spend it, and this will be direct responsibility of citizens, which is fantastic. According to calculations by the Canadian Administration, each family living in Canada will receive on average $700 per year from the new carbon tax, which will fully compensate for the negative externalities imposed by pollution.
The economist Lorenzo Bernaldo de Quirós has written several times about the path dependence of investments in the energetic sector. This means that investment decisions taken today in relation to this sector, will bring results in the very long term, if any, which is why the dynamic costs of the decarbonization have a greater relevance than static costs, as Bernaldo de Quirós explains. That’s why it’s essential to reduce infrastructure costs along with burocratic procedures and barriers of entry. Making investment easier and cheaper will more than probably increase FDI (Foreign Direct Investment) from countries with an enormous specialization on our sector of interest, as China, Israel or the USA. Let’s make investment in renewable energies desirable!
To finish up, I know some people will call me socialdemocrat or even neo-socialist for defending some kind of carbon taxes as Pigouvian taxation, but capitalism consists basically on property rights, and the function of the State is guaranteeing them. So, if we have property on something, we should bare all the costs produce by it, therefore carbon taxes are justified when their purpose is internalizing costs, but not when they are purely confiscatory. Let’s put the climate change debate far apart from populisms from either extreme, let’s talk about it in rational terms; and, as always, while defending liberty and enforcing prosperity.