New Role for the WTO
Herman Daly reminds us that we make the world by the questions we ask. Setting policy in accord with first principles allows us to act now without getting mired in endless delays caused by the questions of complex empirical measurement and prediction.
THE RECENT INCREASE in attention to global warming is very welcome. Most of the attention seems to be given to complex climate models and their predictions. It is useful, however, to back up a bit and remember an observation by physicist John Wheeler, “We make the world by the questions we ask.” What are the questions asked by the climate models, what kind of world are they making, and what other questions might we ask that would make other worlds?
The climate models ask whether CO2 emissions will lead to atmospheric concentrations of 500 parts per million, and whether that will raise temperatures by two or three degrees Celsius by a certain date. What will be the likely physical consequences in climate and geography, in what sequence, and according to what probability distributions? What will be the damages inflicted by such changes, as well as the costs of abating them, and what are the ratios of the present values of the damage costs compared to abatement expenditures at various discount rates? What kind of world is created by such questions? Surely a world of such enormous uncertainty and complexity as to paralyse policy. Scientists will disagree on the answers to every one of these empirical questions.
Could we ask a different question that creates a different world? Why not ask: can we systematically continue to emit increasing amounts of CO2 and other greenhouse gases into the atmosphere without eventually provoking unacceptable climate changes? Scientists will overwhelmingly agree that the answer is ‘no’. The basic science, first principles, and directions of causality are very clear. Focusing on them creates a world of relative certainty, at least as to the basic thrust and direction of policy. Only the rates, sequences and valuations are uncertain and subject to debate. As long as we focus on measuring these inherently uncertain empirical consequences, rather than on the certain first principles that cause them, we will overwhelm the consensus to ‘do something now’ with the second order demands to ‘first know the exact consequences of what we might someday do’. To put it another way, if you bale out of an airplane you need a crude parachute more than an accurate altimeter. And if you also happen to take an altimeter with you, at least don’t become so bemused in tracking your descent that you forget to pull the ripcord on your parachute!
The next question we should ask is: what is it that is causing us to systematically emit ever more CO2 into the atmosphere? It is the same thing that causes us to emit more and more of all kinds of waste into the biosphere – namely, our irrational commitment to exponential growth forever on a finite planet. Again we ask the wrong question: how can we grow faster and become richer? Instead we should ask: does growth of the economy, as it physically expands into and displaces the finite biosphere, really increase production benefits faster than it increases environmental and social costs? How do we know that costs are not now increasing faster than benefits, and that we have not passed the optimum scale of the economy relative to the biosphere, and entered an era of ‘uneconomic growth’? Our GDP measures only ‘economic activity’ and does not distinguish costly activities from beneficial ones.
THE ‘EMPTY WORLD’ of the 19th century laid the foundations of neoclassical economics, where burning more fossil fuels made us richer because environmental costs were negligible. But in the ‘full world’ of the 21st century it makes us poorer because the environmental opportunity costs are very great. Consequently, policy should now aim at reducing the throughput of fossil fuel rather than increasing it.
Is it hard to come up with a reasonable policy for doing this? Not really – a stiff severance tax on carbon, levied at the wellhead, mine mouth or port of entry, would go a long way by both reducing carbon use and giving an incentive for developing alternative carbon-free technologies.
Yes, but how do we know what is the optimal tax rate, and wouldn’t it be regressive, etc.? Once again we make the world by the questions we ask. We need to raise public revenue somehow, so why not tax carbon extraction heavily and compensate by taxing income lightly? More generally, tax the resource throughput (that to which value is added) and stop taxing the value added. Tax ‘bads’ (depletion and pollution), not ‘goods’ (income). Does anyone imagine that we tax income at the optimal rate? Better first to tax the right thing and later worry about the optimal rate of taxation, compensation for regressivity, etc.
People don’t like to see the value added by their own efforts taxed away, even though we accept it as necessary up to a point. But most people don’t mind seeing resource rents, value that no one added, taxed away. And the most important public good served by the carbon tax would be climate stability, brought about by the consequent reduction in use of carbon fuels and the incentive to invent less carbon-intensive energy sources. And much of the revenue from the carbon severance tax could be rebated to the public by abolishing other taxes, especially regressive ones such as the payroll tax.
Setting policy in accord with first principles allows us to act now without getting mired in endless delays caused by the uncertainties of complex empirical measurements and predictions. Of course the uncertainties do not disappear. We will experience them as surprising consequences, both agreeable and disagreeable, necessitating mid-course correction to the policies enacted on the basis of first principles. But at least we will have begun a process of moving in the right direction. To continue business as usual while debating the predictions of complex models in a world made even more uncertain by the way we model it is to fail to pull the ripcord. The predicted consequences of this last failure, unfortunately, are very certain.