Why carbon emissions need to be dealt with at a European level…

The European Commission has produced another daft and damaging proposal in their efforts to combat climate change. This is regrettable both for the commission’s image and for the climate cause.

My efforts to comment on this have produced an essay, so I am going to post it in three parts, which readers may read from as they will. In this part, I will explain why I believe that Europe is the right forum in which to address climate change. In Part 2 I will condemn the announcement that was made yesterday. In Part 3 I will offer a liberal alternative to the authoritarian socialism that has suffused much of the environmentalist debate.

Let me be clear about where I stand from the outset. There are things which should be settled at a European level, and there are things which should not. One of those that should is carbon emissions.

Pollution is a classic “free rider” problem. Firstly, pollution is an “externality”, dull econospeak for a cost which an individual (business or person) can place on society while reaping the benefits themselves; I gain from driving my car, whereas the cost of the exhaust is shared equally by all of us. Secondly, reform costs the producer a lot and the benefits are shared across everyone; I give up a lot if I decide to forego the car, but the benefits are spread very thinly across lots of people. Consequently, as Jean Jacques Rousseau pointed out so eloquently in the C18th, the rational choice for the individual is to encourage others to do the right thing while being selfish oneself.

Producing energy from carbon is cheap, because the producer bears only some of the “social cost”, the rest being “externalised” to the wider population through pollution. If we are to curtail pollution, we must make individuals (be they businesses or people) bear the full social cost of what they are doing. However, national governments cannot be trusted to do this, again, due to the free rider problem: restricting activities that generate waste carbon dioxide will reduce short-term and localised economic efficiency, while the benefits are long term and widely distributed. Consequently, it is in any one country’s interests to let others confront climate change while the country in question carries on in the most individually-economically efficient manner; so China may burn coal like there’s no tomorrow, while hoping that the USA joins the EU in sweating about climate change.

The economic principle behind the European Union (not always treated with due respect by its member states) is that no country should seek economic advantage by trading unfairly. This is why we are faced with sometimes baffling European directives: it is only if a German customer knows what a Portuguese manufacturer means when they say “widget”, and what has gone into producing it, that the German customer can make an informed choice as to whether the Portuguese widget is worth buying in comparison to the (perhaps more expensive) German variety. Sometimes this goes too far: if the rules require that everything going into the widget be the same, including (for example) the cost of labour, then the Portuguese lose their competitive advantage and, potentially, if over regulated to the point of uniformity, the whole point of competition is lost. Thus not everything needs to be regulated at a European level.

Carbon emissions are one area where European collaboration is required. No individual nation-state can be relied upon to curb carbon emissions if it requires the government to cut off the nation’s economic nose to spite the world’s polluting face. In truth, as this is a global problem, this probably requires a global solution. The flawed Kyoto protocol aside, however, this remains a pipe-dream – or perhaps a nightmare, if too much universal government is the price that must be paid. However, in the absence of a global solution, a multilateral scheme among some of the world’s largest economy’s, which between them form the largest single economic union in the world, seems like a good place to start.

France (say) will never cut carbon emissions if it fears that Italy (for example) will thumb its nose at such efforts and gain an economic advantage by carrying on as normal. But if enough major economies take a stand, the costs will be spread, the benefits tangible, and other nations may just be shamed into pulling their weight.

Only through working together can climate change really be addressed. Collaboration is essential, but it alone is not sufficient. The right policies are also required.