You can’t buck the climate

Telegraph leader column: “The Daily Telegraph accepts that the planet is getting warmer, and that human activity is probably contributing to this.”

Stern Review on the Economics of Climate Change: “The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent global response.”

Telegraph: “It is a pity that all three main parties have bought into the idea that state regulation is the answer. Market mechanisms have proved highly effective at delivering green goals.”

Stern: “Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen.”

The Telegraph – which is, alas, not alone in its ‘I’m-not-a-racist-but’-type attitude to climate change – seems to believe that if the climate becomes a piece of collateral damage in the war against the nanny state, then that would be regrettable but acceptable. And by pretending that the free-rider problem of collective action doesn’t exist, it elides the connection between state compulsion and market mechanisms.

If everyone’s choices are voluntary, the incentive for any given market participant to make the short-term individual sacrifice needed for long-term collective gain will be minimal. This is why coordination by government (and, of course, among governments) is essential. In this case, a simple fear of future climate change – even if universally held – will not inspire adequate action by individual people and corporations.

The amount of CO2 (and other greenhouse gases) in the atmosphere is not the sort of thing that can be purchased by eco-conscious consumers, nor is it something that can be offered for sale by companies. Neither supply nor demand, in the standard economic sense, will coherently operate here. For market mechanisms to play an effective role, legislation has to create a market for emissions.

Stern argues that “international collective action will be critical in driving an effective, efficient and equitable response on the scale required. This response will require deeper international co-operation in many areas – most notably in creating price signals and markets for carbon, spurring technology research, development and deployment, and promoting adaptation, particularly for developing countries.”

And: “Putting an appropriate price on carbon – explicitly through tax or [emissions] trading, or implicitly through regulation – means that people are faced with the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low-carbon alternatives.“

Market forces are tremendously powerful; they can outwit state regulation and drive the perpetual innovation that improves people’s lives. But without governments coming together to point the way, even Adam Smith’s invisible hand can’t buck the climate.