On June 18, 2015, Coral Davenport, writing in the New York Times, was the first in the press to note that the encyclical on the environment, Laudato Si’, released by Pope Francis that same day, with tremendous praise from diverse quarters, “is as much an indictment of the global economic order as it is an argument for the world to confront climate change.”
The New York Times and a Couple of Asia Trips
The Times article included the following: “…environmental economists criticized the encyclical’s condemnation of carbon trading, seeing it as part of a radical critique of market economies. ‘I respect what the pope says about the need for action, but this is out of step with the thinking and the work of informed policy analysts around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments — carbon taxes and/or cap-and-trade systems,’ Robert N. Stavins, the director of the environmental economics program at Harvard, said in an email. The approach by the pope, an Argentine who is the first pontiff from the developing world, is similar to that of a ‘small set of socialist Latin American countries that are opposed to the world economic order, fearful of free markets, and have been utterly dismissive and uncooperative in the international climate negotiations, Dr. Stavins said.”
Those are accurate quotes from an email I sent to Coral Davenport in response to her inquiry the same day. The reason why I sent an email, rather than calling was that I was, at that moment, approximately 37,000 feet over the Pacific Ocean, flying from Seoul (where I had spoken at the third annual Future Energy Forum) to San Francisco, on my way home to Boston.
The following week, I was flying back to Asia (this time to Beijing for a workshop jointly sponsored by the Harvard Project on Climate Agreements and China’s National Development and Reform Commission – a topic for a future blog post, but not for today). As I sat in the departure lounge at Chicago’s O’Hare International, I began to see on my iPhone a small flood of hostile commentary from the blogosphere, indicating that I had unfairly “attacked the Pope.”
Well, writing an email rather than chatting on the phone with a reporter may eliminate some spontaneity, but it does have the advantage of preserving a record. So, I’m pleased to be able to share with readers today the views I offered on June 18th, long before the Pope’s recent visit to Cuba and the United States. My views have not changed.
Why Write About This Now?
That’s a reasonable question. In part, I’m inspired by a marvelous essay by Yale professor William Nordhaus, “The Pope & the Market,” which appears in the October 8, 2015 issue of The New York Review of Books. However, my thoughts are completely independent from his, and so he should not be indicted for anything I have to say. But I do heartily recommend his essay, and urge readers to take a look at his commentary (as well as mine).
With that preamble out of the way, here are the reactions of one environmental economist, yours truly, to Laudato Si’, nearly verbatim from my June 18th message from 37,000 feet over the Pacific Ocean, with some additional text and links for this blog essay.
An Environmental Economist Reflects on the Papal Encyclical
The Pope is to be commended for taking global climate change seriously, and for drawing more world attention to the issue. There is much about the encyclical that is commendable, but where it drifts into matters of public policy, I fear that it is – unfortunately – not helpful.
The long encyclical ignores the causes of global climate change: it is an externality, an unintended negative consequence of otherwise meritorious activity by producers producing the goods and services people want, and consumers using those goods and services. That’s why the problem exists in the first place. There may well be ethical dimensions of the problem, but it is much more than a simple consequence of some immoral actions by corrupt capitalists.
The document also ignores the global commons nature of the problem, which is why international cooperation is necessary. If the causes of the problem are not recognized, it is very difficult – or impossible – to come up with truly meaningful and feasible policy solutions.
So, yes, the problem is indeed caused by a failure of markets, as the Pope might say, or – in the language of economics – a “market failure”. But that is precisely why sound economic analysis of the problem is important and can be very helpful. Such analysis points the way to working through the market for solutions, rather than condemning global capitalism per se.
Should Carbon Markets be Condemned?
In surprisingly specific and unambiguous language, the encyclical rejects outright “carbon credits” as part of a solution to the problem. It says they “could give rise to a new form of speculation and would not help to reduce the overall emission of polluting gases”. The encyclical asserts that such an approach would help “support the super-consumption of certain countries and sectors”.
That misleading and fundamentally misguided rhetoric is straight out of the playbook of the ALBA countries, the small set of socialist Latin American countries that are opposed to the world economic order, fearful of free markets, and have been utterly dismissive and uncooperative in the international climate negotiations. Those countries have been strongly opposed to any market-based approaches to climate change, including carbon taxes, cap-and-trade, and offset systems, as well as any approaches that would allow – through appropriate linkage – the financing by one country of emissions reductions in another country (see my previous essay at this blog on A Key Element for the Forthcoming Paris Climate Agreement).
If the references to “carbon credits” were intended to refer only to offset systems (such as the Clean Development Mechanism) and not to cap-and-trade systems, then I would be much less concerned about the Pope’s complaints. However, the encyclical does not make the distinction. Indeed, I doubt that the authors of the encyclical recognize the difference, and unfortunately, readers of the encyclical will likewise lump together all carbon markets, which is what some policy makers also do, unfortunately.
Out of Step
I respect what the Pope says about the need for action, but his unfortunate attack on the use of the market to address climate change is out of step with the thinking and the work of informed policy analysts and policy makers around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments – carbon taxes and/or cap-and-trade systems. UN Secretary General Ban Ki-moon has been outspoken in precisely this regard.
Furthermore, the United Nations Framework Convention on Climate Change itself (Article 3.3) explicitly states that “policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible cost” and thereby be more ambitious. That is why market-based climate policy instruments are an important option for many countries. Keeping costs down will help inspire greater action.
Concluding Thoughts
The Papacy is to be commended for having drawn attention to climate change as a major issue. But, sadly, the encyclical fails to recognize that because externalities (such as CO2 emissions) are a type of market failure and because the global commons nature of the problem and consequent free riding are also a profound market failure, it is for these reasons that working through the market is absolutely necessary – in order to address the climate problem in ways that are scientifically meaningful, economically sensible, and ultimately politically pragmatic.
By incorporating the anti-market rhetoric of the ALBA countries, the encyclical unfortunately goes beyond these errors of omission to incorporate significant errors of commission by emphasizing a perspective that is not progressive and enlightened, and would – I fear – ultimately work against meaningful climate policy at the international, regional, national, and sub-national levels.
That is why I said that although there is much about the encyclical that is commendable, where it drifts into matters of public policy it is – unfortunately – not helpful.
A carbon tax, if applied at source and, importantly, based on the amount of carbon removed from geologic storage without deductions for amounts used in the producing operations, has the possibility of shifting the entire economy towards other energy sources. On the other hand, I worry that cap+trade schemes are more like the arcade game Whack-a-Mole, with the result that the carbon emissions will simply shift elsewhere.
A major reason for equating the two as somewhat equivalent market mechanisms seems to me to be a consequence of looking at carbon emissions as just an uncosted externality in the economic system. They are that, but they are also more — they are the very basis of the economy (c.f. Georgescu-Roegen and Beinhocker). Cap+trade treats only the externality portion of the problem whereas a carbon tax uses market mechanisms to change the basis of our economy’s energy structure.
Perhaps this makes the pontiff’s concerns, despite their anti-market expression, more understandable.
Very informative blog post. Glad you are clarifying this and standing up for sensible (and near consensus) analysis.
Your ideas are more practical in the current & future climate regime context & I am in full sync with you (as a LA in CH3 of WGII of AR5). However, carbon tax/PPP should be applied globally qith an equitable framework where DCs have concessions, led by the ICs. Please read my latest article on PPP in Laws, Mizan
I am in full sync with your ideas under the present & upcoming CC regime, but carbontax/PPP should be applied globally under an Equity Framework, led by the ICs. Pl have a look at my latest Article on PPP in Laws just published, MIzan
Pope Francis, correctly in my view, makes a basic criticism of economics. “Once more, we need to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals.” Economists may claim that there is abundant empirical evidence that this magical conception is a pretty good model for reality, but then many economists also claimed that there was abundant evidence for the efficient market hypothesis.
Look again at your statement: “The long encyclical ignores the causes of global climate change: it is an externality, an unintended negative consequence of otherwise meritorious activity by producers producing the goods and services people want, and consumers using those goods and services.” People want junk cigarettes; is it really meritorious to produce them. Same for junk food, muscle cars, etc., etc., let along munitions.
“sadly, the encyclical fails to recognize that because externalities (such as CO2 emissions) are a type of market failure and because the global commons nature of the problem and consequent free riding are also a profound market failure, it is for these reasons that working through the market is absolutely necessary”
I agree that, whenever possible, a market solution to climate change will be probably faster than any other, since less changes will be necessary. Thank you for the excellent article. Just a little comment about the quote:
I do not think that it is proven that market economy can account for this externalities, as there is a strong relation politics-free market (lobbying of powerful economic interests) that may ultimately prevent the necessary adjustments. Sometimes one cannot find the solution within a system, because of inherent difficulties, and thus has to go beyond. Therefore, using the words ‘absolutely necessary’ seems to me not absolutely necessary.
Market-based mechanisms may be useful but in my view, they need to be considered not only in terms of their power (political) and knowledge (rational) aspects, but also in terms of their wider acceptability (‘justice and equity’) to make them sustainable socially. It is this justice and equity side of the equation where the Pope can make useful and welcome inputs as they are usually neglected.
As you explain eloquently over and again, MBMs are believed to reduce emissions efficiently and effectively, and make sense based on utilitarian and consequentialist ethics. At the same time, the utilitarian approach of MBMs is criticized for being reductionist and oversimplifying. This reductionism and simplification is also what makes utilitarianism and MBMs so pragmatic, popular and attractive as it allows for comparing the ‘costs’ and ‘benefits’ of climate action (as Lord Stern did in his Reviews and the Global Commission on the Economy and Climate has done more recently). Such utilitarian ‘neoliberal’ perspectives on sustainability have been criticised for “de‐politiciz[ing] sustainable development by downplaying the importance of the social and political dimensions of environmental problems”, for “representing sustainable development primarily as an economic problem (…) [and] merely as a question of utility, satisfaction and individual responsibility” (García‐Rosell & Moisander 2008:212). Sunstein further suggests that people have a moral heuristic and resist against policies designed to reduce emissions indirectly (e.g. through pricing) instead of using strict quantity limits; “people should not be permitted to engage in moral wrongdoing for a fee” (2005: 537).
Moreover, Veal and Mouzas (2012) demonstrate that the much promoted benefits of emissions trading, namely capital efficiency through market flexibility and the ability to set emission reduction targets at the outset, are not being realized during carbon market operation. Instead, they recommend carbon taxes, mandated targets, and processes of target- and policy-setting by bodies that are politically independent (and resistant to capture).
On the ‘moral plus side’ both fossil-fuel subsidy reform and carbon pricing can generate resources that can be redistributed to the population. As such, MBMs can improve equity because poor households consume less energy than richer households. (Cohen et al., 2013; World Bank, 2013) British Columbia’s carbon tax is progressive through recycling carbon revenue through tax cuts on both labour and capital, as well as through transfers to the population. (Beck et al., 2014)
So, lots more to explore and hope the Pope has triggered some constructive discussions!
Just curious.
How do explain the 2 degrees century,and growing, variation between land based temperature and lower troposphere satellite measurements? Why have 95 % of the models, even using the adjusted land data, failed to date?
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Why is summer arctic sea ice at a 12 year high instead of vanishing as predicted with certainty? Why is Greenland ice growing so rapidly and now Antarctica, according to NASA, continuing to grow as well, essentially unabated for the last 10,000 years?
Why is Antartic sea ice continuing to set records in three of last four year? Why did Argos not find the expected ocean warming?
If unrewarded consensus, contrary to the present one, were actually important in shaping reality the continents would stop moving and we would all know the wonders of the cosmic ether.
Just suppose, for even a second, that co2 based AGW models are way off the mark and that much the current and future capital expended on this effort is waisted. Would all the participants of that group think, including climate scientists, politicians and yes even economists be responsible for that misalocation of scarce resources?
Just asking.